Periodicity assumption definition
/What is Periodicity in Accounting?
The periodicity assumption states that an organization can report its financial results within certain designated periods of time. This typically means that an entity consistently reports its results and cash flows on a monthly, quarterly, or annual basis. These time periods are kept the same over time, for the sake of comparability. For example, if the reporting period for the current year is set at calendar months, then the same periods should be used in the next year, so that the results of the two years can compared on a month-to-month basis.
Once the standard periods have been set up for financial reporting, accounting procedures are designed to support the ongoing and standardized production of financial statements for the designated periods. This means that a schedule of activities will mandate when accruals are to be posted, as well as the standard structure of the resulting journal entries.
Advantages of the Periodicity Assumption
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. Fixed reporting periods provide the same level of consistency to the external users of an organization’s financial statements, who can readily compare a firm’s financial results and financial position over multiple periods of time.
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Inconsistent Accounting Periods
It is also possible to have inconsistent periods. This situation typically arises for the two reasons noted below:
Partial period start or end. An entity has begun or ended its operations part way through a reporting period, so that one period has an abbreviated duration. This is typically a one-time event.
Four-week periods. A company may report its results every four weeks, which results in 13 reporting periods per year. This approach is internally consistent, but is inconsistent when the resulting income statements are compared to those of an entity that reports using the more traditional monthly period. This approach is rarely used.
Standard Period Durations
The main periodicity issue is whether to produce monthly or quarterly financial statements. Most organizations produce monthly statements, if only to gain feedback on operational results on a fairly frequent basis. Publicly-held businesses are required by the Securities and Exchange Commission to issue quarterly financial statements, which they may issue in addition to monthly statements that are issued internally. From an accounting perspective, it is more difficult to produce reports for large numbers of reporting periods, because more accruals are needed to apportion business activities among the various periods.