Time period assumption
The time period assumption (also known as periodicity assumption and accounting time period concept) states that the life of a business can be divided into equal time periods. These time periods are known as accounting periods for which companies prepare their financial statements to be used by various internal and external parties.
The length of accounting period to be used for the preparation of financial statements depends on the nature and requirement of each business as well as the need of the users of financial statements. Normally, an accounting period consists of a quarter, six months or a year.
The time period assumption enables business organizations to stop and see how successful they have been in achieving their objectives during a particular period of time and where the room for improvement exists.
The users of financial statements need current and reliable information to evaluate financial performance and position of the companies to make important decisions and take appropriate actions. The time period assumption enables companies to divide their economic activities into short time periods. For each time period, companies prepare and publish a set of financial statements to meet the needs of the users of financial statements. The time period for which a financial statement is prepared is shown in its heading.
The income statement tells interested parties how profitably the company has carried out its operations during the period and balance sheet discloses the financial position of the the business at the end of the period. The statement of cash flows shows the reasons of inflows and outflows of cash and cash equivalents during the period and statement of retained earnings tells what portion of the company’s profit has been distributed among its owners and what portion has been kept in the business for future growth.
This information is very important for internal management, actual and potential investors, creditors, government agencies and other users of financial statements to decide what to do and what not to do in future. The time period assumption facilitates the provision of latest relevant and reliable financial information to the relevant parties to make reliable business decisions in a timely manner.
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