Accounting Concepts - 6. Accounting Period Concept:
The accounting period concept comes from the going-concern concept. According to the going-concern concept, a business is likely to continue for an indefinitely long period of time. As such, the financial results of the business operations (i.e., the profit or loss and the financial position of the business) can be ascertained only after the liquidation of the business. It is true that such results (i.e., the financial results ascertained on liquidation of the business) are accurate. But the ascertainment of the profit or loss and the financial position of a business only on its liquidation will not serve any useful purpose. It will not be helpful to the business in taking corrective steps at the appropriate time. Further, income-tax law requires business undertakings to calculate their profits yearly. Above all, for the purpose of reporting to outsiders like creditors, profits are required to be calculated and financial position is required to be ascertained yearly. Thus, for various reasons, the financial results of a business are required to be ascertained at shorter intervals. So, for measuring the financial results of the business, the business or the working life of the business is split into convenient periods of time. such a period of time is called an accounting period.
The length of the accounting period depends on the nature of the business and the objective of the proprietor of the business. The accounting period may be three months, six months, one year or even two years. But usually, one year is regarded as the ideal accounting period. The one-year accounting period is also recognised by law. In fact, the one-year accounting period is compulsory under the Companies Act and the Taxation Law. So, the accounting period is, often, referred to as the accounting year. The accounting year may be the English calendar year (i.e., from 1st January to 31st December of a year) or the fiscal year or the financial year of the Government (i.e., from 1st April of a year to 31st March of the next year) or any other year of twelve months, say, Dassera year, Deepavali year, etc.
The accounting period concept comes from the going-concern concept. According to the going-concern concept, a business is likely to continue for an indefinitely long period of time. As such, the financial results of the business operations (i.e., the profit or loss and the financial position of the business) can be ascertained only after the liquidation of the business. It is true that such results (i.e., the financial results ascertained on liquidation of the business) are accurate. But the ascertainment of the profit or loss and the financial position of a business only on its liquidation will not serve any useful purpose. It will not be helpful to the business in taking corrective steps at the appropriate time. Further, income-tax law requires business undertakings to calculate their profits yearly. Above all, for the purpose of reporting to outsiders like creditors, profits are required to be calculated and financial position is required to be ascertained yearly. Thus, for various reasons, the financial results of a business are required to be ascertained at shorter intervals. So, for measuring the financial results of the business, the business or the working life of the business is split into convenient periods of time. such a period of time is called an accounting period.
The length of the accounting period depends on the nature of the business and the objective of the proprietor of the business. The accounting period may be three months, six months, one year or even two years. But usually, one year is regarded as the ideal accounting period. The one-year accounting period is also recognised by law. In fact, the one-year accounting period is compulsory under the Companies Act and the Taxation Law. So, the accounting period is, often, referred to as the accounting year. The accounting year may be the English calendar year (i.e., from 1st January to 31st December of a year) or the fiscal year or the financial year of the Government (i.e., from 1st April of a year to 31st March of the next year) or any other year of twelve months, say, Dassera year, Deepavali year, etc.
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