Accounting Period

An accounting period is a set time during which accounting activities are performed, aggregated, and analysed, such as a calendar year or fiscal year. The accounting period is helpful in investment because prospective shareholders analyse a company’s performance via its financial statements based on a predetermined accounting period.

Reporting and analysis need accounting periods. An organisation wants consistent growth over accounting periods to show stability and long-term profitability. Accrual accounting supports this idea. The accrual method of accounting demands an accounting entry anytime an economic event happens, regardless of the monetary element. In accrual accounting, a fixed asset is depreciated during its life. This recognition of expenditure across many accounting periods allows for relative comparability instead of a whole period of expenses when the item was paid for.

Sole traders may change their accounting period but must update HMRC and their tax returns. HMRC needs a reason for the change to approve it (or not). Remember that the initial accounts for the new accounting period must not be more than eighteen months; if a previous change in accounting date has happened in any of the previous five tax years, HMRC must be provided with a good reason for the change. Any adjustments must be for commercial, not tax reasons. Sole traders should be wary of HMRC basis periods since altering an accounting period might produce overlapped earnings because tax bills are always based on the tax year. In most cases, overpayments may be reimbursed upon cessation of self-employment.