Rebekiah has taught college accounting and has a master's in both management and business.
Time plays a very important role in accounting and financial reporting. In this lesson, you will learn why time is important as we discuss periodic reporting and the time period principle.
Periodic Reporting Defined
In accounting, transactions affect account balances on a daily basis. When account balances change, so does the overall financial status of an organization.
People, like investors, creditors, company executives and employees are all very much interested in the financial status of a company. Because of that, the concept of periodic reporting was created. Periodic reporting means that company finances are reported in distinct time periods.
The Time Period Principle
The time period principle goes hand in hand with periodic reporting. This principle is one of the major accounting principles that were created by the Financial Accounting Standards Board, which is also known as the FASB. The FASB is the governing board of accounting practices in the United States.
The time period principle states that the activities of a business can be broken down into specific, short and distinct time intervals. These intervals can be monthly, quarterly, semiannually or annually. It just depends on what the specific company feels is necessary to accurately show their financial status at specific points in time.
Why Time Periods Are Important
Does it really matter when financial information is reported? It actually does.
Company leadership needs to see the financial reports of a business more than just once a year, simply because they have to forecast the future sales, expenses, and staffing of their company. Information that is reported on the financial statements allows them to do that forecasting as accurately as possible.
For investors, creditors, and those that are potential investors and creditors, it lets them see how well the company is performing at different times as well as comparing past and present performance records. This allows them to make informative decisions on whether they want to enter into or continue business relations with the company.
Employees are interested in the financial status of the company for two very good reasons. First, employees may take part in profit sharing within a company. In that case, the better the company performs, the more money that employees are building in retirement accounts. Second, employees are interested in company finances because it can affect their job security. They need to know that the company is on track financially, or if it isn't, they need to prepare themselves for potential lay-offs and shut downs.
Regardless of the reason for periodic reporting and the time period principle, they are both very important in the world of accounting.
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Periodic reporting and the time period principle go hand in hand. Periodic reporting means that company finances are reported in distinct time periods, while the time period principle means that the activities of a company can be broken down into specific, short, distinct time periods. These time periods can be weekly, monthly, quarterly, semiannually or annually, whichever best suits the specific company and accurately portrays their financial status at specific points in time.
The time period principle is one of the generally accepted accounting principles that have been established by the Financial Accounting Standards Board (FASB). The FASB is the governing board of accounting practices in the United States.
There are a number of individuals who use the data that's reported on the financial statements, such as company leaders, investors, creditors and employees. Employers use the financial data to aid them in forecasting the future sales, expenses and staffing needs of their company. Investors and creditors want to see how well a company is performing so they can decide whether to continue their current relationships or enter into new relationships with the company. Now, employees may be interested in the financial data that is reported for a company when they are participants in profit-sharing plans, and the better the company does financially, the more their nest egg grows. A second reason employees may find financial data important is that it gives them an insight into how well a company is performing or not performing, which is important for job security.
Reporting financial data in a timely and orderly fashion is not only a requirement of the FASB, but it's also a vital part of a company's livelihood.
You'll have the ability to do the following after this lesson:
Explain what periodic reporting is and why it's important
Describe the requirement of the time period principle according to the Financial Accounting Standards Board
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