For a growth curve of your business in a financial year, periodic sessions of accounting and bookkeeping processes are important. Without these practices, you cannot grow a business from scratch or continue the growth of an established one. Knowing What is my company accounting period is important for every businessman associated with small or large business setups. This article will help you understand this in detail.
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What is a Company’s Accounting Period?
Establishing and maintaining a business requires your dedication, hard work, and vigilance. When you are running a business or establishing a new one, there are many deadlines and targets that you must achieve in a set time, and the company accounting period is one of them.
The company accounting period refers to the period used by the company to finalize its transaction and account procedures for a financial year. This duration can be weekly, monthly, bimonthly, or yearly depending upon the span of the company’s business. The periodic accounting sessions regularly allow transparency in company cash flow and help in planning future business strategies. In the company accounting period, the accounting reference date is the day that marks the end of the financial year. This date is usually set by the company depending upon the accounting period.
Why is a Company’s Accounting Period Important?
Knowing your company’s accounting period is crucial for the following reasons:
- Meet tax deadlines: the company accounting period ensures periodic completion of accounting procedures. This helps with maintaining tax records throughout the year.
- Master your financial reports: The company accounting period is important as it generates a financial report showing the growth curve of the company and helps you keep track of the cash flow in the company and if there is any fraudulent activity going on in the accounts department.
- Analysis of the business: The financial reports help you analyse how well your current business strategies are contributing towards the growth of your business and generating yearly profits.
Getting the Company Accounting Period Right
Company accounting periods are defined in the following ways:
- Fiscal year: A fiscal year is defined as a year that ends on any day other than December 31st; for example, a fiscal year can end on March 31st.
- Calendar year: A calendar year is 12 months starting on January 1st and ending on December 31st.
- Accounting reference period: This is the time duration commonly used for accounting purposes by businesses and limited companies. The accounting reference period ends on the accounting reference date, which is defined by the limited company itself.
How Do Company Accounting Periods Work?
As mentioned above, there are multiple types of accounting periods. A company may choose to adopt one or multiple accounting periods. For example, a company may wish to close its financial records in June. This marks the accounting reference date defined by the company. Now it’s the choice of the company to do accounting sessions on a weekly, monthly, or quarterly basis (every four months).
The accounting reference periods are useful for accountants and shareholders in a company. Having periodic accounting sessions helps the company and its shareholders to check where the company stands among its competitors in the market. The accounting periods can also be used to compare how the changes in strategies are affecting the company’s business, client and company relationships and overall reputation. For example, if a quarterly accounting period indicates a decline in company growth, the company makes changes in its business strategies. On the next quarterly accounting session, the result indicates growth in company business as compared to the previous accounting period.
Where is the Company’s Accounting Period Indicated?
The financial statements issued by the bank on the defined accounting period and the company accounting register indicate the accounting reference period in their headers. The bank financial statements indicate the transactions and payments history of the company account and indicate the balance at the end of the accounting period. On the other hand, the company balance sheet indicates the shareholder’s list, shares of the company in the stock market, other assets associated with the company, liabilities, equity at a specific time in the financial period, dividends given by the company to its shareholders, and corporation tax paid by the company at the end of the financial year to the HMRC.
Requisites for the Accounting Period
The accounting period revolves around two methods described below.
1- Revenue recognition principle
As the name indicates, this method states that revenue should be added to the company record only when the company gains profit, not when the amount of cash is exchanged. If a company is unable to earn profit in a financial year or in its accounting period, then the company must open a deferred revenue account to show that it has not earned any revenue yet.
2- Matching principle
The matching period rule, as the name indicates, is that during an accounting period, the cost of goods sold (COGS) should be matched with the revenue earned. This means that the revenue earned and the cost of goods should be matched at the same time.
This method is applied in expanded form where the company expects that the revenue will be generated in the long run. For example, a company buys new machinery to upgrade its current setup. Now the cost of machines will be covered as the products will be produced, marketed, and sold, and then revenue will be generated. Now the event is associated with the machine, but the accounting period differs. In such cases, the expense of the machine is spread over the useful life of the machine or the guarantee period by the manufacturers.
Can a Company Change its Accounting Period?
An accounting period is used for business analysis. A company can change its accounting period if the board of directors feels that the growth and expansion pattern of its business has changed.
Company Accounting Periods for Corporation Tax
Since the accounting period is the duration of returning tax to the HMRC, the duration of accounting cannot be longer than 12 months. Since there can be multiple durations of accounting periods, it can affect the tax return date to the HMRC. The HMRC website helps companies to keep records of their accounting periods and corporation tax returns. If the accounting period and the tax return dates are different for a company, then the company should
- Check progress in the first year of setup
- Check if the company needs to open a different account.
If the accounting period date is longer than 12 months, then the company must file two corporation tax return files because the accounting period cannot be longer than 12 months, according to HMRC. Additionally, the company should update HMRC for its longer financial year.
Conclusion
The company’s accounting period is the duration in which a company analyses its financial bank statements and plans its future business plans. The duration of the accounting period is defined by the company itself; however, the HMRC has set the limit of a financial year, which cannot be longer than 12 months. The two methods of accounting periods are the revenue recognition principle and the matching principle. The company may need to expand the matching principle if the revenue is expected to be generated over a duration longer than the defined accounting period.
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Disclaimer: The general information provided in this blog about the company accounting period includes text and graphics. It does not intend to disregard any of the professional advice in the future as well.