As the name suggests, it is the time period for which a business prepares its set of accounts. An accounting period usually comprises twelve months. However, it can be shorter and longer than 12 months.
Once businesses establish an accounting period, the accrual method of accounting facilitates consistent reporting between accounting period.
Under the accrual accounting, income or expense transactions are recorded when they occur. Under cash accounting, transactions are recorded when cash is paid or received.
Deciding on an accounting period
You can use a calendar year as your accounting period.
A better approach is to align the accounting period with the Financial year. This will facilitate efficient calculation of taxes, employee bonus payments and reporting to investors.
Usually, the first accounting period is either longer or shorter than the twelve months. This happens as you may not have set up a business on the exact first day of a calendar month, for example.
For both company and individual tax purposes, the accounting period cannot exceed 12 months.
When does an accounting period begin?
An accounting period begins when:
- A business or company is incorporated; or
- Immediately after the completion of the previous accounting period.
When does an accounting period end?
At the earliest, the accounting period ends as follows:
- The end date set by the business;
- Twelve months after the trade commencement date;
- When a business decides to change its accounting period; or
- When a business ceases to trade.
Mike sets up a new company with his friend Jessica on 16 December 2020.
First accounting period will start on 16 December 2020 and end on 31 December 2021- 12 months and 15 days.
Second accounting period will start on 01 December 2022 and end on 31 December 2022- precisely 12 months.