Definition:
Periodicity assumption is the accounting concept used to prepare and present Financial Statements into the artificial period of time required by internal management, shareholders, or investors.
What does an artificial period mean?
Well, most of the financial statements are prepared based on fiscal years. Sometimes, based on tax years for the tax purpose or as required by the regulator or local authority.
However, in Periodicity Assumption, the Financial Statements are prepared for internal and external purposes, based on the period required. For example, for internal control, management, shareholders, creditors, or bankers.
Based on Periodicity Assumption, the Financial Statements could be prepared and presented weekly, monthly, quarterly, annually, or in other artificial time frames.
You might need to see the advantage and examples to advance your understanding of this concept.
In some cases, the period is specified by management. This concept is prepared according to nature and life cycle rather than the accounting period. This assumption is mostly used to prepare Income Statements rather than Balance Sheets.
This concept is different from the going concern concept. Going concern concept is based on the accounting period of twelve months.
It is prepared based on the assessment and assumption that the company may not have any problems in the next twelve months.
Yet, the periodicity concept is based on the nature of the business and management requirements.
Advantage of Periodicity Assumption
Using Financial Statements that is prepared based on the going concern concept is quite difficult for management to control and assess the performance of the companies.
Yet, by using the Financial Statements prepared based on Periodicity Assumption, management has weekly, monthly, or quarterly to assess and analyze the company’s performance and financial status.
Some nature of business requirements management to know what exactly happens in the company as well as in the market. Waiting for annual Financial Statements is not the right choice.
Therefore, the concept of preparation of Financial Statements based on Periodicity Assumption is that the entity Financial Statements.
Financial Reports could be prepared and presented in an artificial period of time. That preparation based on Periodicity Assumption, which allows them to see the financial performance more accurately, is strategically important.
To implement the Periodicity Assumption more successfully, an organization needs to identify the period of the time frame that Financial Statements are required to prepare.
Once the time frame is identified, internal control over financial reporting should be appropriately set up and controlled. Ongoing assessment and improvement need to move monitors.
Example of Periodicity Assumption
For example, management is considering investing in new projects similar to the existing ones. To make the correct decision, management needs to assess and predict the expected gain on the new investment. Usually, they use two years of financial performance.
In this case, we can use the periodicity assumption to produce a financial report for management to make the correct and accurate decision making.
Written by Sinra
