Periodicity assumption states the company needs to report financial information in such a manner that the current period can be compared with the previous periods. In other words, the company needs to use specific/designated periods for reporting purpose. For instance, the company can report its financial information/performance monthly, quarterly or yearly and so on.
It’s important to note that the periodicity assumption is not about the number of days but the specific number of days. For instance, thirty days’ business performance in April can be compared with the thirty days’ performance in March. It’s not like you can compare thirty days’ performance of April by taking 15 days from April and 15 days from March. So, the financial reporting period needs to be comparable and that’s only possible when the business complies periodicity assumption.
Similarly, there is a need to compare specific periods against specific periods. For instance, monthly performance can be compared with the month; quarterly performance can be compared with the quarter, yearly with yearly and so on.
What is year on year comparison?
The companies need to record thousands of accounting transactions daily. These transactions are summarized in a report format to be used by investors. The companies report their financial performance weekly, monthly or yearly.
In the context of periodicity assumption, the company needs to select some specific period to report their financial information. For instance, ABC Limited starts yearly reporting on the first day of January and ends on the last day of December. So, the company must ensure the exact dates are followed in the next financial reporting period. Otherwise, users of a financial statement may not be able to compare financial information as it won’t be like by like. Hence, the purpose of the periodicity assumption is to ensure dates used in the reporting periods can be compared.
Importance of periodicity assumption
The investors need to compare the economic activities of the business from period to period. It helps to locate if the business has performed well or if there is a need to improve at some operational /strategic level. It means the decision of the financial statement users is dependent on the periodicity. Hence, management needs to ensure the periodicity concept is followed in accounting.
Further, it’s important to note that auditors need to check periodicity by cutting off testing during audit execution.
Periodicity assumption example
Eureka construction limited prepares a yearly financial statement for the period between January 1st and December 31st. The financial statement for 2020 and 2021 was prepared for the exact dates from January 1 to December 31st. It’s compliance with the periodicity concept. It’s because performance in the year 2021 can be compared with the performance in 2020.
The periodicity assumption states that the company needs to prepare a financial statement for periods that be compared. It helps users of the financial statement to compare and locate business performance. If periods to be compared are inconsistent, there is a need to adjust periods accordingly.
Frequently asked questions
Why is periodicity important in accounting?
It enables financial statement users to compare periodic performance. Hence, it’s an important assumption from a financial analysis perspective.
How does the periodicity assumption affect an accountant’s analysis of accounting transactions?
The periodicity assumption enables accountants to compare periods with each other. And we understand comparison is an excellent tool to conduct financial analysis. Hence, periodicity assumption impacts on the accountant’s analysis of accounting transactions.
Is the periodicity concept same as going concern assumption?
No, the periodicity concept is very different from going concern. Periodicity assumption is limited to the selection of reporting periods. On the contrary, the going concern assumption is about the overall ability of the business to remain operational for a foreseeable period.