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Written by vuhoangexocad in Uncategorized
Sep 15 th, 2021
Additionally, the assumption supports the company’s budgeting process by breaking down annual financial goals into manageable quarters, thus facilitating strategic planning and resource allocation. Ultimately, the regular application of this assumption contributes to the transparency and relevance of financial information, empowering stakeholders with up-to-date insights for effective decision-making. Periodicity assumption refers to an accounting term that refers to creating and presenting financial statements in a way that meets a set artificial time frame.
For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. An earth-moving equipment manufacturer may require two years to build a special machine for one of its customers. Periodicity allows the manufacturer to divide the manufacturing costs of the machine into the 24 monthly periods covered by the contract.
When we compare annual and monthly financial statements, we can see that monthly statements do not provide a complete picture of a corporation as annual financial statements do. – The periodicity assumption is an interesting compromise between accounting relevance and reliability. Outside users of financial statements want financial information as soon as possible in order for it to be relevant in their decision-making. Unfortunately, the more frequent the information is issued, the less reliable it is. For instance, monthly financial statements give investors great performance information in a timely manner.
If we evaluate annual and monthly financial statements, we can deduce that monthly statements don’t give a perfect picture of a business compared to annual financial statements. The periodicity assumption states that an organization can report its financial results within certain designated periods of time. This typically means that an entity consistently reports its results and cash flows on a monthly, quarterly, or annual basis. These time periods are kept the same over time, for the sake of comparability. The financial statements created on the basis of the periodicity assumption aid in assessing the performance of organizations across certain time periods. This assumption is used to create financial statements on a monthly, quarterly, or annual basis.
Further, fluctuation in sales and other figures can help identify seasonal variations and plan for the changing demands of the customers. The users of financial statements are interested in the financial performance of an entity. They analyze the performance of a business by interpreting quarterly or interim reports.
Most of the company follow the calendar year which starts at January and end with December) as the basis to prepare a financial report. However, there are still other companies that end their report in June or September each year. Some nature of business requirements management to know what exactly happens in the company as well as in the market. The primary goal of analyzing trends in a company’s financial ratios and other data is to identify anomalies and forecast the future.
This adherence to the periodicity assumption allows the company’s management, investors, and creditors to track changes in sales, production costs, and net income over time. The main periodicity issue is whether to produce monthly or quarterly financial statements. Most organizations produce monthly statements, if only to gain feedback on operational results on a fairly frequent basis. Publicly-held businesses are required by the Securities and Exchange Commission to issue quarterly financial statements, which they may issue in addition to monthly statements that bond issue cost journal entry are issued internally. From an accounting perspective, it is more difficult to produce reports for large numbers of reporting periods, because more accruals are needed to apportion business activities among the various periods. As the year-end income statement of a business shows the entity’s performance for a whole year.
Although, a single month financial statement shows a far less accurate picture of the business compared to an annual financial statement. Investors and creditors want the most current information possible to base their financial decisions on. For instance, investors often look at quarterly financial statements in order to predict what the business performance might be in the next quarter. Without the time period assumption, businesses wouldn’t be able to issue these timely reports. To implement the periodicity assumptions practically, the business needs to understand and identify which time frame (i.e., monthly or quarterly) is better for preparing financial statements.
These time frames are set by investors, shareholders, or internal management. Moreover, these statements are usually issued for regulatory purposes or tax purposes based on fiscal years or tax years. The accounting guideline that allows the accountant to divide up the complex, ongoing activities of a business into periods of a year, quarter, month, week, etc. The precise time period covered is included in the heading of the income statement, statement of cash flows, and the statement of stockholders’ equity. Even though the going concern assumption dictates that businesses should be treated as if they will continue indefinitely, it is helpful to view business performance in shorter time frames. The periodicity assumption is important to financial accounting because it allows businesses to show current performance to investors and creditors for shorter periods of time.
Although, companies can change their reporting periods to enhance the use of the financial statement. However, it will lead to changes in the deadline for filing accounts and tax returns. Systematic presentation of the financial statement helps track and manage the financial and operational performance of the business. Further, systematic comparisons with different companies help to better understand the business performance. Using the periodicity assumption, the company can use consistent and uniform accounting treatment to evaluate business profitability and asset valuation.
Periodicity allows companies to report meaningful financial statements covering relatively short periods of time. Yet, by using the Financial Statements prepared based on Periodicity Assumption, management has weekly, monthly, or quarterly to assess and analyze the company’s performance and financial status. Based on Periodicity Assumption, the Financial Statements could be prepared and presented weekly, monthly, quarterly, annually, or in other artificial time frames.
This approach is internally consistent, but the resulting income statements are incongruous when compared to those of an organization that reports using the more standard monthly period. The assumption of periodicity assists the firm in preparing financial statements at regular intervals and identifying any periodic inadequacies in the set of financial information. In addition, the calculation and filing of taxes, budgetary controls, and the application of internal controls provide us with an additional benefit of the periodicity assumption. In this case, regardless of when the money is received or paid, the income and expenditures are recorded as soon peanut butter price history from 1997 through 2021 as they are earned. In addition, the periodicity assumption ensures timely reporting, allowing stakeholders to access up-to-date information for decision-making.
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