PERIODICITY ASSUMPTION: Definition, Example and Benefits

The periodicity assumption follows the principle that companies can divide their financial activities. Therefore, it assumes companies can separate their revenues and expenses into distinct and consecutive accounting periods. The periodicity assumption plays a significant role in informing users about the period of financial performance. As stated above, companies must mention the period for each financial statement in the heading. Therefore, it allows stakeholders to understand the period for which companies prepare those statements.

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Revenue Recognition Principle (IFRS): Definition, Using, Formula, Example, Explanation

An income statement is an example of a financial statement that follows the periodicity assumption. The income statement discloses revenue and expenses for a particular time period, usually monthly, quarterly, or annual. For the effective implementation of the periodicity assumption, a company needs to figure out the time frame that financial statements are required to get ready. When the time frame is identified, internal controls on financial reporting can then be put into place to ensure its proper implementation.

• A company may report its results every four weeks, which results in 13 reporting periods per year.
• Maintaining fixed reporting periods is an essential requirement for proper management control of a business.
• By doing so, it makes the comparison between various periods more straightforward.
• Some business activities span multiple time periods, and allocating these activities to a single time period can be somewhat arbitrary.

How does the periodicity assumption affect an accountant’s analysis of accounting transactions? Explain accrual basis accounting, and when to recognize revenues and expenses and how it differs from cash accounting. The business can apply consistent and uniform accounting treatment to calculate business profitability and valuation of assets by using periodicity assumption. Time period assumptions are used to provide a more accurate picture of the value of assets and liabilities held for long periods and how business is doing throughout each month or quarter.

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It’s also possible that these assumptions can make it difficult for readers who are unfamiliar with how they work in financial statements. 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. Maintaining fixed reporting periods is an essential requirement for proper management control of a business. With consistently-applied periods, management can more readily compare financial and operational results from period to period, and develop trend lines from which actionable information can be extracted.

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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. The advantages of the periodicity assumption are that it allows for a more precise view of a company’s financial position and performance.

This allows for a more precise view of the company’s financial position and performance. In this manner, the reason for planning financial statements according to the periodicity assumption is that the financial statements could be prepared and presented in artificial periods of time. That plan is based on the periodicity assumption which permits them to see the budgetary presentation all the more precisely as deliberately significant. The periodicity assumption plays a crucial role in enhancing the comparability of financial statements. In the absence of this principle, companies may report their results for irregular periods.

Importance of periodicity assumption

Investors are typically interested in a company’s quarterly financial statements in order to forecast the company’s performance for the next quarter. As a result, without a period assumption, it would be impossible to provide such stakeholders with timely financial reporting. The periodicity assumption states that the company needs to prepare a financial statement for periods that be compared. It helps users of the financial statement to compare and locate business performance. If periods to be compared are inconsistent, there is a need to adjust periods accordingly. The time period assumption encourages the use of the most recent and reliable information by those preparing the statements so that timely decisions can be made for the benefit of the company.

It all depends on your company’s needs and what information you want to convey about your business operations through financial reporting. The periodicity assumption allows companies to divide their financial activity into distinct accounting periods, such as weeks, months, or years. Assume the company prepares monthly financial reports and earns $500 in revenue in the first month but does not receive payment until the following month. As a result, in such a case, the corporation should include revenue in the current month’s financial statements. Data gathered in an accounting system must relate to a specific business unit or entity.

Additionally, they may defer certain expenses until later periods to minimize their current-period costs and enhance reported profits. The major underlying assumptions or concepts of accounting are (1) business entity, (2) going
concern (continuity), (3) money measurement, (4) stable dollar, and (5) periodicity. making a payment This section
discusses the effects of these assumptions on the accounting process. As such, the periodicity assumption can result in misstated financial statements when practiced unethically. As with all other assumptions, this helps ensure accuracy and consistency when preparing financial statements.

What is Periodicity Assumption? (Explanation)

That’s the reason why the periodicity assumption is preferred while presenting financial information. This assumption allows the companies to prepare their financial statements monthly, quarterly, semi-annually, or annually. The periodicity assumption, also known as the time period assumption, is an accounting guideline which states that the economic life of a business can be divided into artificial time periods.