Periodicity assumption is the accounting concept that use to prepare and present Financial Statements into the artificial period of times as required by internal management, shareholders or investors.
What does an artificial period of time mean?
Well, most of the financial statements are prepared based on fiscal years. Sometimes, base on tax years for the tax purpose or as required by the regulator or local authority.
However, Periodicity Assumption, the Financial Statements are prepared for internal purpose as well as external purpose, base 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 in 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 the nature and life cycle of business rather than accounting period. Mostly this assumption is using to prepare Income Statements rather than prepare Balance Sheet.
This concept is different from the going concern concept. Going concern concept is based on the accounting period for twelve months. It is prepared based on the assessment and assumption that the company may not have any problem 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 that prepare based on Periodicity Assumption, management has weekly, monthly or quarterly to assess and analyst the company performance, as well as 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 Report could be prepared and present into the artificial period of times. That prepare base on Periodicity Assumption which allows them to see the financial performance more accurately is strategically important.
To implement Periodicity Assumption more successfully, an organization needs to identify what is 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 then be properly set up and control. Ongoing assessment and improvement need to move monitors.
Example of Periodicity Assumption
For example, management is considering to invest the new projects which are similar to the existing one.
In order to make the correct decision, management needs to assess and predict the expected gain on the new investment. Normally, they use a two-year period of financial performance.
In this case, we can use the periodicity assumption to produce a financial report for management. So that they could make the correct and accurate decision making.
Written by Sinra
Related book: Accounting Principles