Time period principle - What is the time period principle?
The time period principle (or time period assumption) is an accounting principle which states that a business should report their financial statements appropriate to a specific time period.
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In financial terms, a time period is often referred to as the accounting year, or accounting and reporting time periods. These periods can be quarterly, half yearly, annually, or any other interval depending on the business’ and owners’ preference.
The importance of time period principle
The financial statements of any business tell a story of the business’s activities and their position at a certain point in time. Therefore, the importance of the time period principle is to inform any readers about the time period for which the financial statements have been prepared.
The general concept of the time period principle assumes that all businesses can divide their financial activities into artificial time periods. In other words, all revenues and expenses can be systematically assigned to distinctive and consecutive accounting time periods.
However, not all transactions can easily be assigned to a specific time period. In these cases, the transactions and the period need to be estimated to a specific time period. An example of this is depreciation for equipment expenses, which depends on the estimated number of years which the fixed asset will be functioning and in use.
The time period principle and your accounting
The time period principle allows for your accountant to measure your business performance. If you do not divide time into specific periods, it will be difficult for your accountant to separate transactions that occurred in different time periods. Furthermore, if your business transactions are not recorded in different time periods, it will not be possible to compare transactions against each other, or to measure the business position and other financial aspects.
Which financial statements are we talking about?
When we talk about preparing and recording the financial statements appropriate to a specific time period, we are talking about income statements, balance sheets, statement of cash flows, and statement of changes in equity.
The time period principle and other accounting principles
Just like the time period principle, there are a few other accounting principles with are also concerned with income measurement assumptions. These include the matching principle, and the going concern principle.
The matching principle states that each revenue recorded should be matched with the related expenses at the same time. In other words, for every debit there should be a corresponding credit (and vice versa). The matching principle is therefore dependant on the time period principle, since in order to allocate revenues and expenses to a specific accounting time period it is first necessary to determine the length of these accounting periods.
Another connection to the time period principle, is the going concern principle. The going concern principle states that businesses should assume they will continue to operate and exist in the foreseeable future, and not liquidate. This assumption therefore allows businesses to defer some accrued expenses to future accounting periods. In order to do so, the an accounting period needs to be defined, which is where the time period principle comes in.
Debitoor and the time period principle
Debitoor invoicing software aims to help you comply with accounting principles by using an automated system to match your transactions as easily and quickly as possible. One of the features in our larger subscription plans allows you to upload your bank statements which will automatically match each payment to the corresponding invoice or expense.