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The accounting period concept involves recording all transactions in the books of accounts with the understanding that profits will be assessed for a specified period. This requires the preparation of a balance sheet and profit and loss account at regular intervals, which is crucial for purposes such as profit calculation, determining financial position, and tax computation.
This concept assumes that the ongoing life of a business is divided into segments known as accounting periods. These periods can vary in length, typically being one year, but sometimes six months, three months, or one month.
Usually, one year is adopted as the accounting period, which can be a calendar year (from January 1st to December 31st) or a financial year (from April 1st to March 31st of the following year).
Under this concept, all transactions are recorded for a specific period, meaning that purchases, sales, rent, salaries, and other expenses incurred during this time are accounted for within the same period.
The significance of the Accounting period concept includes:
It assists in forecasting the future potential of the business.
It enables the calculation of taxes on business income for a particular period.
It allows banks, financial institutions, creditors, and other stakeholders to evaluate and analyse the business's performance over a specific period.
It helps business firms to distribute their income as dividends at regular intervals.
Read the next article to learn more about the Accounting cost concept.