Businesses use accounting periods to measure their financial performance during a specific time—whether monthly, quarterly, or yearly—and to benchmark themselves against competitors, industry peers, and their internal metrics.
Without accounting periods, a business will have difficulty reliably gauging its progress over time—whether sales and profitability are increasing or decreasing, or whether it’s gaining or falling behind the competition.
In this article, you’ll learn more about the different accounting period types and what happens at the end of an accounting period.
What is an accounting period?
An accounting period is a designated time frame in which a business prepares financial data for reporting performance—both internally to managers and externally to shareholders, creditors, and regulators. By using accounting periods, businesses ensure that financial results are measured consistently and reliably while helping companies to create budgets and make forecasts.
During an accounting period, your business compiles the data that’s presented in financial statements at the end of the period. Some businesses use a month as the accounting period, but most use quarterly and annual periods. Merchants can track this data across periods using Shopify’s Finance Summary report, which displays sales, payments, and gross profit for a selected time frame.
Regulators require US public companies to file quarterly and annual financial statements with the Securities and Exchange Commission (SEC) on a set schedule. Private companies don’t file reports to regulators unless they have more than $10 million in assets and stock owned by more than 2,000 investors, or 500 or more shareholders who aren’t accredited investors. They may also have to file if they sell debt securities eligible for public trading.
Analysts and potential shareholders look at accounting periods to identify trends in a business’s performance over a period of time and make comparisons to other companies or a benchmark such as an index.
What to do at the end of an accounting period
- Identify all transactions
- Record transactions in a journal
- Post entries to the ledger
- Prepare a trial balance
- Make adjusted journal entries
- Prepare financial statements
- Close the books
The time when a business adds up all its transactions is driven by the accounting cycle, the process of recording and verifying all transactions during the accounting period. Financial statements such as the income statement, balance sheet, and cash-flow statement are prepared as the accounting cycle is completed. Although businesses may vary in their accounting cycles, the process generally follows this sequence of steps:
1. Identify all transactions
First, find and identify all transactions that occurred during the period—sales, expenses, loans, income, purchases, investments, or items such as accounts receivable and accounts payable.
2. Record transactions in a journal
Record transactions in the company’s journal in chronological order, as they occur. Double-entry bookkeeping records each transaction as a debit and an equal, corresponding credit entry.
3. Post entries to the ledger
Once you record transactions in their specific accounts, enter them into the general ledger, your business’s summary of the five main account types and their respective amounts. These are assets, liabilities, and equity from the balance sheet, and revenue and expenses from the income statement.
Under each account type are sub-accounts. For example, under assets, you may have cash, accounts receivable, and inventory as sub-accounts.
4. Prepare a trial balance
Preparing a trial balance at the end of the accounting period allows you to check your bookkeeping accuracy. A trial balance lists all accounts and their balances, confirming that total debits equal total credits. This is an opportunity to review revenue and expenses, cash flow, and the change in assets, liabilities, and equity from the beginning to the end of the period.
A worksheet can help in spotting imbalances and errors, smoothing the work of adjustment and reconciling imbalances. Worksheets can be done manually, although accounting software such as QuickBooks and Xero usually includes a worksheet function.
5. Make adjusted journal entries
If you spot an imbalance in debits and credits, an adjusted journal entry is needed. Be sure that the adjusted entry notes the previous erroneous journal entry. For example, if a $1,000 sale was improperly recorded as $100, instead of changing the previous journal entry to $1,000, you would make a new entry for $900, adjusting for that balance and noting the previous entry error.
6. Prepare financial statements
With adjusted journal entries now balancing the books, you can prepare financial statements, mainly the income statement, balance sheet, and cash-flow statement. Use your adjusted trial balance and follow generally accepted accounting principles (GAAP) as you prepare the statements.
7. Close the books
Once the financial statements are created, you can close the books for the accounting period. Closing the books means income statement accounts, such as revenue and expenses, are reset to zero, so the next accounting period begins fresh. Any net income or loss is carried to the next period on the balance sheet through retained earnings, an equity account.
Your bookkeeping or accounting department is responsible for maintaining the accounting cycle. You can use accounting software to automate much of this work and spot bookkeeping errors as they happen. The software can then be used to record any adjustments and prepare financial statements.
Key principles for an accounting period
Businesses typically adhere to these essential record-keeping and accounting principles for accurate and consistent financial data:
Accrual method
Accrual accounting requires businesses to record revenue and expenses when they are earned or incurred, regardless of when payment is made. This method more accurately shows a company’s financial health and operational performance from period to period. Accrual accounting differs from cash accounting, which records transactions only when money is exchanged.
Revenue recognition
A corollary to the accrual method is the revenue recognition principle. This states that revenue should be recognized when the money is earned, not when the cash changes hands. This applies when a business sells on credit. For example, a business sells $5,000 of goods in the current period, and customers have 60 days to pay, which occurs in the next period. The business records the $5,000 as revenue in the current period.
Matching principle
The matching principle requires that expenses be reported in the same accounting period in which the associated revenue is reported. For example, say the business had $4,000 in cost of goods sold (COGS) for the items sold in the period. The COGS is matched to the $5,000 revenue to show a gross profit from the transaction.
Double-entry bookkeeping
Double-entry bookkeeping is a system of recording each transaction twice. These are known as bookkeeping entries, and they appear in equal but opposite amounts. One entry shows the source of money for each transaction, and the other entry shows the money’s destination. The double-entry system displays two columns for these entries, called debits listed on the left side of the journal and credits listed on the right.
Types of accounting periods
Companies have the option of using various types of accounting periods, including the following:
Calendar year
Many businesses use a calendar year, from January 1 to December 31, because it aligns with benchmarks such as industry and market indexes. This makes for clearer period-to-period performance comparisons.
For small businesses, the calendar year also makes sense because a business tax filing deadline is synchronized with owners’ individual tax filings. Beginning and end dates for the year are typically displayed at the top of any financial statements.
Fiscal year
A fiscal year is any annual accounting period that doesn’t conform to the calendar year. Roughly a quarter of US companies use a fiscal year to better match their operating cycles or the norms of their industries.
For example, many retail companies use a fiscal year from February 1 to January 31 to reflect the seasonality of consumer spending, such as the November-to-January fiscal fourth quarter that encompasses holiday shopping, customer returns, and post-holiday discount sales.
Tax year
The year for determining a business’s tax obligations is most commonly the calendar year, with a tax filing deadline the following April 15 for C corporations and sole proprietors, or March 15 for S corporations and partnerships. Businesses using a fiscal year can also adopt the same tax year, with payment due by the 15th of the fourth month after the fiscal year ends.
Quarters
Quarterly accounting periods are a year divided into four segments of three months. Quarters are widely used for performance tracking against industry and market benchmarks, and publicly traded US companies are required to file quarterly financial statements with regulators.
Months
Monthly accounting periods are used primarily for internal management, budgeting, and decision-making. They are not required under GAAP or by the SEC.
Accounting period definition FAQ
What is an example of an accounting period?
An example of an accounting period is one quarter of a year, commonly used by US companies to report their financial results. If a company uses the calendar year for accounting, its first quarter would run from January 1 to March 31.
What is the 12-month accounting period?
The 12-month accounting period is a year, the time span that typically encompasses a business’s operating cycle. The year may follow the regular calendar, or it may be a fiscal year with different start and end dates, such as a fiscal year beginning April 1 and ending the following March 31.
Is an accounting period a month?
A month may be used as an accounting period for internal management purposes, but it’s not required for external reporting to regulators or investors.
