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accounting period concept explained

In accordance with the going concern concept, it is usually assumed that the life of a business is indefinitely long. But owners and other interested parties cannot wait until the business has been wound up for obtaining information about its results and financial position. For example If for ten years no accounts have been prepared and if the business has been consistently incurring losses, there may not be any capital at all at the end of the tenth year which will be known only at that time. This would result in the compulsory winding up of the business. But, if at frequent intervals’ information is made available as to how things are going, then corrective measures may be suggested and remedial action may be taken. That is why Pacioli wrote as early as in 1494: ‘frequent accounting makes for only friendship’. This need leads to the accounting period concept.

According to accounting period concept accounting measures activities for a specified interval of time called the accounting period. For the purpose of reporting to various interested parties one year is the usual accounting period. Though Pacioli wrote that books should be closed each year especially in a partnership, it applies to all types of business organizations.

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