Periodicity concept explained

The concept of periodicity helps in the preparation of financial reports, budgets, forecasts, among other things using specific dates. Accounting periods are financial periods decided by the business owners and/or directors. In this article, we explain this term more vividly.

1. What's periodicity concept

The periodicity concept is an assumption that preparers of financial reports or any other reports as required by users must prepare them based on a specified period of time. In most cases one year. The time periods used might be weekly, monthly, quarterly, bi-annually, or yearly. The periods used by an entity depends on what the user wants. For example, management may require daily, weekly, or monthly reports depending on the level of management.

Also, banks may request at least a year's report on cash flow to determine if they should provide loans to the entity. Shareholders and investors usually examine annual reports and compare them with previous years. On the other hand, researchers use periodic statements of businesses to test for hypotheses.

2. Types of periodicity

There are primarily two types of periodicity. These are financial periods and tax (fiscal) years. An entity can decide to use a specific date to prepare their annual report or use the fiscal year.

2.1 Financial year

This is the ending date the entity's management decides to prepare its financial report. This can be a predetermined period or the tax year. The financial or reporting date can run from May 2023 to April 2024, or from October 2023 to September 2024. The important criteria here is that it must run for 12 calendar months and it is determined by management.

2.2 Fiscal year

However, the fiscal year is the government accounting year. In Nigeria, this runs from January to December every year. Management might prefer to use a tax year so as to make it easy for them to compute taxable profit. However, with the 2019 finance act in Nigeria, the determination of basis period of tax assessment is simplified.

3. Applying periodicity concept in accounting

3.1 Financial statements

Periodicity concept is applied to an entity's financial statements. This is why most companies prepare their financial reports to end on a particular date. The advantage of doing so is that it aids comparability which is one of the enhancing qualities of a good financial statement.

3.2 Budgeting

Budgeting is usually based on periodicity assumption. This helps management to compare budgeted values with actual ones on a periodic basis. Lower level management will compare their budget on a weekly basis. Middle level managers does so monthly and quarterly. While top level managers do so on a yearly basis. Without the periodicity concept, this might not be possible.

3.3 Financial modeling

Financial modeling for a business either a startup or well established ones requires timing. Modeling also involves forecasting and the application of time value of money.

3.4 Business valuation

In valuing a business, the periodicity concept is usually incorporated. Businesses are valued based on periodicity basis. The value of a business last year may not the same in the current year. Value changes with time. Either a business is valued upward or download.