Periodicity assumption is an accounting concept that requires a business entity to prepare and present its financial statements based on artificially defined accounting periods. These time periods can either be annual, half-yearly, quarterly, monthly, weekly, or any other time interval specified by the owners or business preferences. However, the standard time-period assumption is one year, 365 days, or 52 weeks, or 12 months which is generally described as the fiscal year. Most businesses have a calendar year beginning from 1st January and ends on 31st December (Subramani, 2011). Such periods vary from one company to another depending on its structure, owners, stakeholders, and size.
Notably, the preparation of financial statements as per the defined accounting periods is regulated by internal and external stakeholders. Companies regularly create and publish their financial statements such as cash flows, journals, income statements, balance sheets, and other statements that can help track revenue, expenses, assets, sales, liabilities, operating capital, and profits (Subramani, 2011). For instance, publicly held corporations such as Amazon, Apple, Netflix, Walmart, Nike, Coca-Cola, and several others are required by the US Securities and Exchange Commission to provide quarterly (every 4 months) and annual (every 12 months) financial statements. Financial reporting is repeated after regular designated accounting periods except on special occasions when a company has started or ended its operations in between the reporting period.
Moreover, periodicity assumption plays a crucial role in providing immediate feedback to inform the stakeholders, the management, creditors, bankers, and the public how the company is doing over discrete artificial accounting periods. Businesses usually monitor their progress and performance over a specific accounting period to gain insights suitable for making investment and strategic decisions (Needles, Powers, & Crosson, 2013). Periodicity assumptions allow internal and external stakeholders to accurately track the weekly, monthly, quarterly, or annual financial status of the business’s overall performance.
Conclusively, the periodicity assumption improves consistency and perfects financial reporting for businesses. Preparing financial statements over regular accounting periods makes financial reporting convenient because it is quite challenging to present compiled reports accumulated for a long time. Thus, periodicity assumption is relevant for continuous assessment and ongoing improvement through regular financial reporting and evaluation.
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage
Subramani, R. V. (2011). Accounting for Investments, Volume 1: Equities, Futures and
Options (Vol. 1). John Wiley & Sons.