Time Period Assumption in Accounting: Definition & Examples

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Business owners need information to make decisions about their business on a regular basis. In this lesson, you will learn about the time period assumption in accounting.

What Is the Time Period Assumption in Accounting?

Let's meet Janet who is about to open a pet food store. Her accountant mentioned that she needs to prepare financial statements at least once a year to comply with the time period assumption, but she is not sure what that means. Let's see if we can help Janet with this problem.

The time period assumption in accounting allows a company's activities to be divided into informal time periods so it can produce financial information which individuals can use to make decisions. Janet will have to produce formal financial reports at least once a year for her external users such as her bank and tax authorities. As such, she will choose a twelve-month period to report the activity for her business and this is known as her fiscal year. The fiscal year chosen varies from business to business.

Let's assume that Janet selects March 31st as her fiscal year-end. She will report all activity for her business from April 1st to March 31st of the next year in her formal financial statements. She will include the revenues or the amount her business earned from selling pet supplies and all the expenses or the costs incurred to help her earn the revenue for the twelve-month period.

Janet can also prepare financial information more frequently than once a year. For example, she could prepare it monthly, quarterly or semi-annually. She would likely need financial information on a monthly basis to run her business effectively.

Let's assume that Janet's business earned revenues of $5,500 and incurred expenses of $3,000 for the month of November. If she prepared her statements monthly, she would determine that she earned net income or the excess of revenues over expenses of $2,500 for the month. Janet can use this information to evaluate if she met her budgeted goals for the month and she can take action if her actual performance is less than she anticipated.

Applying the Time Period Assumption

The time period assumption allows a company to report financial activity for a period of time. Activity for certain accounts such as revenues and expenses are cleared out or taken to zero after the company completes its year-end reporting. This occurs so that the amounts in these accounts reflect only the activity for the current year. If a company did not complete this process, then the amounts in the revenue and expense accounts could relate to previous years and would not provide the owner with relevant information for the current year.

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