1.2.4 Time Period

The time period assumption presumes that the life of a going-concern company can be divided into periods, such as months, quarters, and years, so that financial reports can be prepared separately by those periods.

According to the going-concern assumption, a business will continue to operate by the current size and status. In order to ultimately determine the enterprise’s production and operating results, it seems to have no other choice but to wait until the enterprise is out of business. However, the typical business has a relatively long duration, and what the managers, investors, creditors, and other decision makers need is timely information. So it is not feasible to wait until the business being liquidated before accounting for its success or failure. It’s necessary for enterprises to divide its whole life into continuous periods of equal duration,and then to recognize, measure, and report its financial condition, operating results, and cash flows in each period. Just because of the time period assumption, there are differences between current period and the period before or after and the differences between accrual basis accounting and cash basis accounting. The time period assumption also makes different types of accounting entities have an accounting benchmark,and then exerts receivables, payables, depreciation, amortization, and other accounting treatment methods.

In order to facilitate a better measurement of income and financial position, some businesses select a natural business year as accounting year which ends when operation is at low ebb. Some businesses use the calendar year which end on December 31 as their accounting year. However, because the natural business year of some businesses, such as insurances, also ends on December 31, sometimes it’s hard to determine whether this December 31 represents a natural business year or a calendar year. Moreover, some businesses select a fiscal year as their accounting year, which includes 12 consecutive months and closes at the end of a month other than December. In addition, the accounting period could also be shorter than a year, such as a month, a quarter, and etc.. Usually, the shorter the period of the time, the more accuracy is expected in financial reporting.

In summary, these four fundamental accounting assumptions depend on each other and complement each other. The accounting entity assumption establishes the scope of accounting. The time range of accounting is established by the going-concern assumption and time period assumption. Monetary unit assumption provides the necessary means for accounting. Without the accounting entity assumption, the going-concern assumption would be meaningless. There would be no time period without going-concern assumption. Without monetary unit assumption, there would be no modern accounting.