The periodicity assumption states that the business activities of a company can be divided into specific periods. The reporting periods are usually a month, a quarter, or a year. A reporting period of one year is called a financial year.
Explanation:
The correct way to measure an organization’s performance would be to measure it at the time of its liquidation. However, this approach is not acceptable for reporting users: to make decisions about the organization, they need to assess the results and financial position of the organization during its existence. Hence, financial information about the organization should be provided periodically.
The principle of periodicity assumption accounting suggests that the economic activity of an organization can be divided into artificial periods (monthly, quarterly, annual). It should be noted that the shorter the period, the more difficult it is to determine the results of the activity (net profit) correctly for this period.
The results of action for a month are usually less reliable than for a quarter, while quarterly results are less reliable than for a year. The primary users of information require that the latter be provided as often as possible, but this requirement comes into conflict with the provision of reliability.
The division into specific periods may be dictated by the need for accounting or the wish of the director, shareholders, or investors. It is assumed that the choice of the time slot for further research is critical as it will be used as a basis for assumptions and development strategies.
The process does not end with the establishment of a time frame; further, the principle of periodicity implies strict accounting of incoming and outgoing financial flows. If this principle is not respected, the reliability and quality of the accounting analysis are lost, as it is not possible to assess the development trends of the enterprise.