Sometimes, terms are deceptively simple. This is not the case with today’s term – it’s exactly as simple as it seems.
An accounting period is, quite literally, a period of time in which accounting is being done. Your first quarter is an accounting period, and so is the fiscal year. What makes accounting periods interesting is that they don’t necessarily reflect the calendar period – for example, some companies have their first accounting quarter begin on the last Sunday of January. You could even, hypothetically, have a company whose first accounting quarter begins sometime in October, which is traditionally the start of the fourth quarter.
What are some of the most common accounting periods?
Fortunately, most companies avoid the “first quarter starting in October” situation we just described – what’s more, the reports that companies give on quarterly performance almost always line up with the calendar year, not the accounting year, so as to simplify communication.
The most common accounting period may well be January 1st to December 31st – this is the case when the accounting year lines up with the calendar year. Accounting years can vary substantially, though – your accounting year might start on the anniversary of your business being founded, and end the day before that foundational anniversary.
Other businesses opt to have their fiscal year run from April 1st to March 31st – this lines up with the Government of Canada’s fiscal year, and can be useful for corporations who do a lot of government contract work.
Once you’ve determined the accounting year (sometimes called the fiscal year) of your business, you can break it down into other accounting periods – weeks, quarters, and the like.
Why are accounting periods so important?
Since double-entry bookkeeping was invented over 1000 years ago, consistency and redundancy have been two of the most important features in accounting. The premise is simple – by recording every transaction twice, you can easily “check the books” against each other to see if there are any discrepancies in your finances.
In order to perform double-entry bookkeeping properly (and, indeed, to perform any form of predictive accounting), you need to have the dates on any two related entries match. For example, if you pay out commission to employees for sales made in the 12th accounting month, those commissions need to be listed in that month’s books – even if the actual payment occurs in the 1st accounting month. Consistent accounting periods make this activity, known as the matching principle, possible.
Basically, we need to compare apples to apples. That’s especially true if we’re looking at revenue and losses over time – you can’t be comparing an accounting year to a calendar year, or your data will be skewed. Consistent accounting periods lead to consistent data.
In Canada, the end of your accounting year is also how your corporate income tax filing deadline is determined. Your deadline is 6 months after the end of your accounting year, so it’s important to keep in mind! Need help with tax preparation in Winnipeg? Give us a call.