Businesses are expected to continue for a long time. However, for accounting purposes, it is necessary to separate several time intervals for each business. This is why accountants form the periodicity concept. The principle explains why financial reporting is periodically provided to users.
Periodicity concept defined
The periodicity principle is used to report business activities within a time frame. It allows the accountants to prepare reports for stakeholders within an allocated period. Generally, a period of one year is used in preparing the financial statements of companies.
Periodic reporting helps to boost management's stewardship role. Management reports can be prepared every month for management. This report will show the financial results of the company for the month. This helps management to understand the financial impact of the activities that took place each month.
As a result, they can see areas of weakness and strength and plan on improving the weak spot of the entity while strengthening the strong spot. The periodicity concept works in various areas of a business. Moreso, it relates to other accounting concepts such as going concern, accrual, and matching concepts.
Types of periods
Accounting periods
Accounting periods are when the top management of a company decides on when the financial statements should be prepared. The accounting period is usually within 12 months, say January to December, April 2024 to March 2025, October 2024 to September 2025.
There are also shorter accounting periods including weekly budget, monthly management report, quarterly financial statements, and biannual reports. Longer business modelling and forecasting also exist. These are usually for five years split into annual financial statements.
Fiscal year
A fiscal year is the government's reporting year. In Nigeria, this runs from January to December. It is when the government of a country prepares its financial reports. Many companies, especially banks, use the government fiscal year in reporting financial results.
Tax year
The tax year can be on the preceding accounting year or the actual year. This is also referred to as the basis period in taxation. By proceeding accounting year, the tax man means the accounting reporting period is a year before the tax reporting year. To avoid duplication of articles, the tax year will be discussed in the future in this blog.
Relationship between periodicity and other accounting concepts
The periodicity principle relates to going concern, matching, and the accrual concept.
The going concern concept explains that a business will continue for a long time and is not expected to end. To keep this principle alive, the periodicity concept divides the perpetual life of a business into timeframes. That is, monthly, quarterly, biannually, and yearly.
The matching principle explains that income and expenses relating to a particular period must be matched to know the profit earned. Without the periodicity concept, this principle cannot be done. As financial reports are prepared within a timeframe, only those income, expenses, assets, and liabilities within that timeframe are used in their preparation.
Accrual accounting looks at reporting revenue when they are earned and expenses when they are incurred rather than when cash is received or paid. This accounting basis is based on time. Therefore, it relies on the periodicity principle to make it work. Only income and expenses that are earned and incurred, respectively, in a particular period are reported in the financial statements.
Benefits of the periodicity concept to businesses
Investors relations
The NGX requires companies to provide their financial reports to the investing public within three months after the end of their financial year. This will help potential and actual investors to make decisions based on early information about the company. To achieve this, companies have to decide on their accounting period.
Paying taxes
The accounting period decided by a business is a requirement for paying company income tax. The tax authorities expect a company to pay its income tax 6 months after its accounting period.
Financial planning
Planning for the future is a timing issue. With this concept, managers can make a financial plan for one year or several years such as a five-year plan. Budgets are usually prepared for a year and broken down into 54 weeks for operational budget and monthly for revenue, production, and cash budgets.
Cash flow management
The periodicity concept allows financial managers to effectively manage cash. With proper planning, the right amount of cash will be available monthly to meet business operations and other needs that are planned in the budget.
Seasonal variations
Dividing a company's financial activities into periods helps to understand seasonal variations. Managers can know whether the periods' demands are high or low and plan for them.
In final words, the periodicity concept helps to account for managers’ stewardship. Also, it is used in planning, taxation, seasonal variations, and cash flow management. When a business failed to apply this concept, it wouldn't know its financial results in a well-defined pattern.
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