Time Period Principle
Even though most business decisions are long-term in nature, the time period principle requires businesses to take stock of their financial position and performance separately for each period. This allows investors and other stakeholders to get relevant information on timely basis.
While a business may prepare its financial statements for a month, a quarter or a half-year, many accounting frameworks require preparation of financial statements for each annual period at least.
Role of each component of financial statements
Investors and other users of financial statements are interested in knowing both about financial performance and financial position.
While the income statement provides us an insight into the performance of a company for a period of time, the balance sheet provides a snapshot of the financial position (assets, liabilities and equity) at the end of the period. Similarly, the statement of cash flows and the statement of changes in equity provide details of how the financial position has changed during the time period.
Time period principle and adjusting entries
Since many business transactions span over multiple periods, management must make estimates and judgments at the end of each time period to decided which events to report in the current time period and which ones in the next and at what amounts. For example, in a multiple-period construction contract, management must assess the percentage of contract completed in each period and recognize revenue accordingly.
Accountants are required to make adjusting entries at each period end to recognize accruals and prepayments, depreciation and amortization, foreign exchange adjustments, etc.
Time period principle and matching concept
Revenue recognition principle and matching concept are relevant to time period principle. Revenue recognition principle provides guidance on when to record revenue while matching concept tells us how to reach an accurate net income figure by creating 1-1 correspondence between revenues and expenses.
by Obaidullah Jan, ACA, CFA and last modified on