The accounting principle known as “time period assumption” says that time needs to be divided into distinct, consecutive periods and that accounting transactions can be allocated to these periods in accordance with standards defined by other accounting principles and laws. It is one of the fundamental accounting principles that apply to both cash-basis and accrual-basis accounting, as well as its variants.
The purpose of time period assumption is to ensure financial reporting of the business remains consistent and financial information is given in a comparable format.
Businesses and other economic entities compile and record transactions using one of the several accounting bases that best meet their needs and preferences. Each accounting basis may be seen as a collection of principles and rules that describe how accountants should record transactions when utilizing that basis. The time period assumption is shared by the two most prominent accounting bases, cash basis accounting and all types of accrual basis accounting.
Also read, elements of financial statement.
Time Period Assumption: Applications
Using the time periods assumption, businesses may account for their revenues and expenses in one of three ways.
- The first way entails reporting one month’s revenue or spending at a time, which would result in a more volatile income statement than if the whole year’s data had been employed.
- The second option is to report the average monthly income or spending over a period of months. This would give readers an idea of how busy each month was.
- The third alternative is to report the whole revenue or expense for a quarter at once. This method gives readers a basic idea of how much was earned and spent throughout each accounting period but omits information about what occurred during that period.
Example of Time Period Assumption
Let’s analyze a situation where the time period assumption could be applicable. A company reports its yearly revenue in one month as opposed to twelve. It is stated that the total revenue is $100 million, but there is no information provided regarding how it was collected or which months were particularly successful or failed.
Advantages and disadvantages of Time Period Assumption
Utilizing time period assumptions in accounting offers several advantages, including:
- It provides a more realistic view of the company’s performance month-by-month or quarter-by-quarter, as opposed to only examining the whole year.
- It allows organizations to distribute income across many time periods.
- It provides a more realistic depiction of the worth of a company’s retained long-term assets and liabilities, such as real estate or equipment.
The time period assumption also has disadvantages. These are;
- When too many assumptions are made about income and expenses across shorter time intervals, vital information is lost.
- As it does not present a thorough picture of the actions during each accounting period, it may mislead some readers.
- When assumptions about revenues and expenses are developed over a lengthy period of time and they do not align with revenue from completed projects, or when an income statement is used to predict future profits, vital information is lost.