Time Period Principle
Although businesses intend to continue in long-term, it is always helpful to account for their performance and position based on certain time periods because it provides timely feedback and helps in making timely decisions.
Under time period assumption, we prepare financial statements quarterly, half-yearly or annually. The income statement provides us an insight into the performance of the company for a period of time. The balance sheet (also known as the statement of financial position) provides us a snapshot of the business' financial position (assets, liabilities and equity) at the end of the time period. The statement of cash flows and the statement of changes in equity provide detail of how the company's financial position changed during the time period.
One implication of the time period assumption is that we have to make estimates and judgments at the end of the time period to correctly decide which events need to be reported in the current time period and which ones in the next.
Revenue recognition and matching principles are relevant to time period assumption. Revenue recognition principle provides guidance on when to record revenue while matching concept tells us how to reach an accurate net income figure by creating 1-1 correspondence between revenues and expenses.
Written by Obaidullah Jan, ACA, CFA