In some of the ERP tools, there are more than 12 accounting periods in a financial year. This article discusses the concept of accounting calendar and accounting periods. Learn why different companies have different accounting periods. Understand some of the commonly used periods across different organizations and the definition & use of an adjustment period.
The accounting Period in bookkeeping is the period with reference to which accounting books of any entity are prepared. It is the period for which books are balanced and the financial statements are prepared. In accounting, financial results are measured by periods. Any period with a defined beginning and end can be used for an accounting period.
The accounting entity is viewed as a going concern and is expected to have a fairly long life. To determine the exact profit or loss of a business enterprise one needs to find that realizable difference between the end value of equity at closure and the investment into the business by the owners. The real value can be determined only when the enterprise is liquidated.
But the owners need to know the profitability of the business on an ongoing basis to make informed business decisions. Hence, to overcome this problem, the accountants have developed the “Concept of Periodicity” for reporting the periodical progress of a business entity. This period for which the enterprise is determining and reporting its operating profit is the accounting period.
Generally, the accounting period consists of 12 months but we see differences in the way different organizations define their accounting period. There exist multiple reasons for the same.
Some periods are set by outside authorities and in that case, the beginning of the accounting period differs according to the jurisdiction. For example, one entity may follow the regular calendar year, i.e. January to December as the accounting year, while another entity may follow April to March as the accounting period. The International Financial Reporting Standards even allows a period of 52 weeks as an accounting period instead of a proper year. Most of the time organizations choose to go with the statutory prescribed fiscal period like going with the periods they need to have for tax purposes. Many countries have prescribed accounting periods that do not follow the natural calendar and these periods are compulsory to be followed by all organizations conducting business in that country. In that case, multi-national companies also need to follow the same period for the operations conducted in that country. This also creates different accounting periods as compared to the global parent company.
Sometimes business circumstances are very compelling to warrant different accounting periods and in that case accounting periods are set solely at the discretion of the company based on their specific business needs, and as explained above, organizations are allowed to define as many periods as they want as long as they meet legal requirements. For example, many restaurants, nearly all the larger chain operators, define their accounting period as consisting of four weeks. They have 13 four-week periods a year, instead of 12 monthly statements. The business reason being, most restaurants do 45% to 60% and even more of their weekly sales on two days of the week, normally Friday and Saturday. This makes it difficult to compare results using monthly periods as the number of week-ends differs from month to month.
Generally, the accounting period consists of 12 months and might follow the natural calendar. Natural Calendar follows the natural sequence of months from January to December.
Any calendar not following the natural months is a “Special Calendar”, for example, a special calendar from “April to March”. In some countries, the beginning of the accounting period differs according to the jurisdiction. For example in India, the prescribed accounting year is from April to March. The Australian government's financial year begins on July 1 and concludes on June 30 of the following year. The Financial Year in Costa Rica spans from October 1 until September 30 of the following year.
The International Financial Reporting Standards allow up-to a period of 52 weeks as an accounting period also known as “Fiscal Calendar”. A large number of companies use 52 weeks fiscal calendar for their reporting and financial tracking purposes. Many companies find that it is convenient for purposes of comparison and also for accurate stock taking to always end their fiscal year on the same day of the week, where local legislation permits. Thus some fiscal years will have 52 weeks and others 53. Fiscal years vary between businesses and countries. The fiscal year may also refer to the year used for financial reporting or for Income Tax Reporting.
It is another method of managing accounting periods. It is a common calendar structure for some industries, like the retail, manufacturing, and parking industry. 4–4–5 calendar divides a year into 4 quarters. Each quarter has 13 weeks which are grouped into two 4-week "months" and one 5-week "month". The grouping of 13 weeks may be set up as 5–4–4 weeks or 4–5–4 weeks, but the 4–4–5 is the most common arrangement. Its major advantage over a regular calendar is that the end date of the period is always the same day of the week, which is useful for shift or manufacturing planning, and in this calendar, every period is the same length. Each accounting period for one business year corresponds to the same accounting period in the previous year, and the next year. This helps in comparative analysis and provides a review and forecast tool for management.
It is a variation of the 4–4–5 calendar. It is used by companies that want their fiscal year to end on the same day of the week. Any day of the week may be used as the ending day, and the use of Saturday and Sunday is common as this facilitates counting inventory and other year-end accounting activities due to business holiday. Some major drawbacks for non-calendar periods are:
Some industries like banking need to maintain their average daily balances. They need to define their transaction calendars specifying each valid business day for which the average balances need to be calculated and maintained in General Ledger.
The transactions have to be identified with a particular accounting period. However, in practice, many business transactions affect more than one accounting period like the assets held with the organization, insurance premium paid in advance, goods sold on credit, capital work in progress, etc.
The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period. Under the matching principle accounting transactions needs to be related to specific accounting periods so that the corresponding revenues and expenses can be accounted for in the same accounting period. This necessitates the need to pass period-end accounting entries.
Large corporations conduct their businesses across the globe-spanning multiple countries. In some jurisdictions or countries, the accounting books need to be maintained as per the rules prescribed by the local laws of that country. Parent company being the owner of the subsidiary units operating in different countries, need to consolidate its results for reporting in its base country of registration. As the units, that are part of the same group of businesses, are not maintaining the same fiscal year in their local books, consolidating companies need to adjust for transactions between units with different fiscal years.
Adjustment Entries and period end entries add complexity to consolidation processes and automated general ledgers help manage these complicated adjustments. ERP tools provide you with the flexibility to define more than 12 accounting periods in a financial year. As a best practice companies using automated general ledgers define adjustment periods in their accounting calendars. They put one accounting period as the "Year Open" period to clear carried over balances from last financial year and the last period as "Year Close" where adjustment transactions are made for the same financial year. These periods are generally known as “Adjustment Periods”.
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts.
Divisional Organizational Structures
The divisional structure or product structure consists of self-contained divisions. A division is a collection of functions which produce a product. It also utilizes a plan to compete and operate as a separate business or profit center. Divisional structure is based on external or internal parameters like product /customer segment/ geographical location etc.
Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.
Global Business Services (GBS) Model
Global business services (GBS) is an integrated, scalable, and mature version of the shared services model. Global Business Services Model is a result of shared services maturing and evolving on a global scale. It is represented by the growth and maturity of the Shared services to better service the global corporations they support.
In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.
In this article, we explain some commonly used subsidiary ledgers like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger, and cash receipts or payments subsidiary ledger.
Different Types of Organizational Structures
Modern business organizations run multiple product and service lines, operate globally, leverage large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders.
Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
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