What are Accounting Periods?
Accounting periods are an artificial method used to make it easier to organize financial records and allow comparison between different time periods. Organisations deal with accounting periods by detailing transactions on an ongoing basis, but compiling the figures into totals for the period. This compilation process requires the organisation to carry out an administrative task that effectively resets the ongoing transaction record before recording new transactions in the new accounting period.
The importance of Accounting Periods in accounting
An accounting system has three broad purposes:
- To record all financial (in the broadest sense, not just cash) transactions
- To meet all legal and taxation requirements
- To provide information to allow managers and/or owners to make business decisions.
Accounting periods are irrelevant for the first purpose because such transactions are on-going but they are essential for the other objectives.
There are several assumptions that accountants make when preparing financial statements and analysts make when reading the statements. These are considered fundamental principles of accounting, more so than the financial standards developed by an individual company. Some key assumptions include that the business is a separate entity, that it is actively trading, and that it uses a consistent monetary unit.
Another key assumption is that the company’s activities can be divided into even and individual time periods. This is artificial, as a company’s trading activities are continuous and ongoing but is necessary to make sure there are regular and comparable sets of financial statements. Most commonly, a company will produce annual accounts, but it may also produce quarterly or monthly figures.
In the UK, limited companies have to produce regular accounts that can be audited both for registration with Companies House and for HMRC for corporation tax assessment. They also need periodic registration of VAT due and paid to calculate net VAT due to HMRC.
In order to ensure that such official reports are accurate – and remain accurate – it is highly advisable to both use and close off accounting periods. This is to prevent the possibility that future transactions (including journals or perhaps changes in currency rates) do not impact earlier reports.
Using Accounting Periods
The use of accounting periods means that a company carries out procedures in a consistent and repeated pattern.
This consists of two types of cycle: individual transaction and closing period.
This usually involves the transaction taking place, the company preparing the relevant documentation like an invoice, the company valuing the transaction and listing it in a relevant journal like that for sales or purchases, and the company copying across the transaction from this journal to the general ledger that acts as a combined record of all transactions. Note that most companies use a double-entry system by which each transaction is recorded in two ways in a journal; for example, a sale is listed once for the receipt of money and once for the loss of the item from stock.
The second cycle is the set of steps followed at the end of each accounting period. This involves verifying that the two sets of transaction listing in each journal add up to the same totals, correcting any errors, copying the details from each journal to the general ledger, preparing financial statements, and posting closing journal entries. This means that although the various journals like sales records are ongoing, there are clear boundaries between the accounting periods, and it’s easy to see the current total for any particular period.
NetSuite Period Close Checklist
This checklist describes the standard required tasks in sequence. Restrictions contained by this sequence can be overridden with the necessary permissions.
- To close a period, first lock out transactions that post to Accounts Payable and Accounts Receivable.
- Review accounts and perform any necessary adjustments. These adjustments can include transactions generated by the system such as intercompany adjustments and foreign currency balance revaluations in OneWorld accounts. Also, if using NetSuite OneWorld, update consolidated exchange rates to ensure that consolidated financials are accurate, and eliminate intercompany transactions if using the Intercompany Auto Elimination feature.
- Reconcile negative inventory, correct transaction/period date mismatches, and validate gapless General Ledger audit numbering.
- If Multi-Book Accounting is used, each accounting book can be individually closed and reopened.
- Close the period to exclude all posting transactions. Later, if additional postings are required, the period can be reopened.