Accounting Period & Change In Accounting Method

Accounting periods and methods are fundamental pillars of financial reporting. The business operation of any organisation depends on the actual accounting method and period they choose. The purpose of setting this standard is to give a framework for financial statements. This facilitates consistent financial analysis & reporting ensuring a structured accounting status and transparency in business operations. 

What are the different types of Accounting Periods?

The way financial data is processed, it's possible for businesses to use multiple accounting periods at once. There are several types of accounting periods that businesses and organisations can adopt based on their needs and requirements. The primary types of accounting periods include calendar year, fiscal year, natural business year, tax year, short period, and 52-53 week year. Let's discuss them briefly to have a clear understanding.

Calendar Year

The calendar period is the most common accounting period among businesses and organisations. As the name suggests, this starts on January 1 and ends on December 31, like a traditional annual cycle. Generally, sole proprietorships, partnerships, personal service corporations, and *S corporations opt for this period. Companies adopting this period should start collecting their accounting records on January 1st and finish the period on December 31st.

*S Corporation is a U.S. corporation that elects pass-through taxation, where income and losses flow through to shareholders' personal tax returns. It offers limited liability protection, allows up to 100 shareholders who must be individuals or certain entities, and files Form 1120S annually with the IRS.

Fiscal Year

Like the calendar period, it is also a 12-month accounting period, but the Fiscal Year can start and end on any other date than January 1. Although many businesses start and end their fiscal year according to government tax dates, in reality, businesses have the freedom to choose any date to begin their accounting period. For example, you can start your fiscal year on June 1 and end on May 31 the following year.

Short Tax Year

The short tax year is an accounting term of less than 12 months. It is commonly used when a firm is founded, dissolved, or the accounting period changes.

Monthly Year

Many businesses and organisations choose to go with a monthly accounting period schedule. While adopting this period, businesses should start collecting their accounting records on the 1st of each month. Some businesses with large fluctuations or rapid periods even decide to break it down by week.

Factors to Consider for Accounting Period Selection

Choosing the right accounting period for your business is crucial. It impacts financial reporting accuracy, Tax Filing Online obligations and overall operational efficiency. Before considering a suitable Accounting Period businesses should consider the following:

1. Business Cycle
2. Regulatory Requirements
3. Comparability
4. Administrative Ease
5. Investor and Stakeholder Expectations

Accounting Method

Accounting methods are the collection of rules that a firm uses to keep track of financial transactions and records. Its primary goal is to offer an accurate breakdown of an organization's costs and revenues.

Suitable accounting methods provide a more comprehensive portrayal of a company's financial status. Choosing the right accounting method for your business is crucial because this impacts how financial transactions are recorded and reported. Two known primary methods, cash and accrual offer distinct approaches to accounting. Businesses must select the method that aligns best with their operations and goals, considering factors like size, industry regulations, and financial reporting requirements, to ensure transparency and compliance while effectively managing their financial health.

Now let's have a look into multiple accounting Methods

Cash Methods

Cash accounting is the simplest method for small businesses. This requires companies and organisations to record cash, expenses, and income. Keep in mind to record income and expenses once received or paid. This doesn't allow any kind of account receivable or payable. Also, these transactions should be reported in the year in which you get the income or pay the expense. Cash accounting tracks and manages the regulation of cash inflow and outflow in a business. 

Businesses should opt for Cash-basis accounting if:

• The business size is small and doesn't deal with extensive inventories.
• All the transactions are in cash, and you don't purchase or sell goods on credit.

Accrual Accounting

Accrual accounting is a more complex accounting method than cash that requires you to record every incoming revenue and expense, even if income is yet to be received and payments are yet to be made. Accrual accounting is the cornerstone of financial reporting for businesses, providing a clear view of their financial health. 

From a business perspective, this method allows a business to record all incoming revenue and gives a better understanding of its profitability. Unlike cash basis accounting, which records transactions only when money changes hands, accrual accounting recognises revenues when earned and expenses when incurred, regardless of when the cash actually flows. This method offers a clearer picture of a company's profitability and financial obligations over a specific period. By matching revenues with expenses, accrual accounting enables businesses to make informed decisions based on real-time financial insights, vital for long-term sustainability.

Hybrid Accounting: 

Hybrid accounting method is a combination of both cash and accrual accounting methods. This allows businesses to manage their finances with greater flexibility and customisation. All transactions and payments related to income and expenses are recorded once they occur. In this method, businesses can record small assets on a cash basis, while long-term investments use accrual accounting. Hybrid accounting offers a balanced approach, combining the advantages of both methods: the detailed financial reporting of accrual accounting and the simplicity and immediate recognition of transactions in cash-based accounting. It provides businesses with the agility to adapt their accounting practices to suit specific circumstances, enhancing decision-making and financial clarity.