Reporting PeriodThe period covered by your financial reports

A year starts with January 1 and ends with December 31.

That’s how it usually goes with calendars right?

So it also makes sense that an accounting period starts and ends the same way.

It’s why you usually see financial statements with the phrase “for the year ended December 31, XXXX”.

We also refer to this format as the calendar year.

However, you may also come across financial statements with the phrase “for the year ended July 31, XXXX” or any other month except December.

You would think that they’re wrong, but they aren’t.

They just don’t follow the calendar year format.

Rather, they follow their own fiscal year format.

The key here is that a full accounting period should include 12 months.

For example, a financial statement that uses the calendar year should start on January 1 and end on December 31.

If it follows the fiscal that starts on August 1, it should end on July 31. Well, that’s how it usually goes externally.

In practice, the length of an accounting period will depend on the needs of its intended audience.

For example, for a monthly report that will be used for monthly meetings, the accounting period is one month.

Sounds complicated? That’s okay.

We will be learning about the accounting period, or rather, the reporting period in this article (spoiler: they’re the same thing).

We will learn what a reporting period is and why it matters for your business.

Along with that, we will also be taking a quick look at the typical reports that a business prepares every reporting period.

What is a Reporting Period?

A reporting period (a.k.a. accounting period) is a specific span of time that a set of financial statements covers.

It defines which business transactions are to be included in the financial reports.

For example, if the reporting period is for the calendar year December 31, 2021, then the financial reports/statement should only include transactions from January 1, 2021, to December 31, 2021.

It is important to define the reporting period. For external users such as investors or creditors, they use it so that they can compare the results of different periods.

For internal users such as the management, a reporting period can be as short as a month, or even a week.

This is because management usually does weekly or monthly meetings to keep track of key performance indicators.

The important thing is that, whatever reporting period is used, it should be applied consistently over time.

Defining the reporting period is also important for accountants or bookkeepers.

A business usually operates continuously with minimal pause (for example, malls are almost open every day).

Wouldn’t it be convenient if you can group these activities into specific, distinct, and short intervals?

For the purpose of financial reporting that is.

Without a defined reporting period, the accountant or bookkeeper wouldn’t know when the starting and ending dates of the reports are.

For reporting periods that span over a year, they either follow the calendar year or their fiscal year.

Reporting periods that follow the calendar year start on January 1 and end on December 31 of every year.

Those that start and end on different dates follow their fiscal year.

Reporting periods that start on June 1 and end on May 31 are an example of those that follow the business’s fiscal year.

How Long is a Reporting Period?

As already mentioned, the length of a reporting period depends on the needs of the intended user.

It can be as short as a week or as long as a year.

Usually for external users such as creditors or investors, the length of the reporting is 12 months or one year.

Most publicly available financial statements have a reporting period of 12 months or one year.

For internal use, the length of the reporting period can be a week, month, a quarter (3 months), semi-annual (6 months), or annual (12 months).

It will depend on the needs of the management or other internal users of financial reports.

For example, employee tax records and inventory reports usually have a reporting period of 1 month.

There are also special cases where the reporting period can be shorter.

This happens when the business is newly created anytime between its usual reporting period.

For example, let’s say a business only started operations on July 1, 2021, but it follows the calendar year.

This means that for the year ended December 31, 2021, the length of its reporting period is only 6 months instead of the usual 12 months.

Another case of a shorter reporting period happens when the business is ending its operations (either through dissolution or sale of the business) before the end of the usual accounting period.

For example, a business that follows the calendar year ends its operations on August 31, 2021.

Instead of the usual 12-month reporting period, the business’s financial reports will only cover 8 months for the year 2021.

The Importance of a Reporting Period

The concept of time is important for financial accounting.

That’s why having a defined reporting period helps in organizing a business’s financial statements/reports that make them relevant and reliable for their intended users.

For example, users of financial statements need current financial information so that they can assess the financial condition of the business.

They then make decisions based on the information they gather from the business’s financial statements.

For investors, they’ll use the information to decide whether they’ll invest in the business.

Creditors will use the information to assess whether the business is worth extending credit to.

And finally, internal users such as the business’s management team will use the information to evaluate key performance indicators.

So having timely financial information is important as a lot of decisions will be made based on it.

A business will continue to operate until it decides to dissolve.

With a defined accounting period, the accounting or bookkeeper wouldn’t know the starting and ending dates of financial reports.

Imagine preparing a financial statement that covers the time from when the business started operating up to the current time.

Not only will it be bloated, but it will also include information that is probably no longer relevant.

The concept of periodicity divides the business’s operations into short periods (monthly, quarterly, or yearly).

It allows a business to group its financial information into short and digestible periods.

Having reporting periods allow businesses to make comparisons of their current financial condition with those of previous years.

Just make sure that they have the same reporting period. For example, compare the current annual financial statements with previous years’ annual financial statements.

The reporting period defines the span of time that a business’s financial statements cover.

Without it, we probably won’t be having reliable and relevant financial reports/statements.

Financial Statements to Prepare Every Reporting Period

The following are financial statements that businesses prepare every reporting period.

The reporting period is usually stated in the header of these financial reports.

Income Statement/Profit and Loss Statement/ Statement of Profit and Loss

A business’s income statement includes information about its financial performance during the stated reporting period.

It shows its user how profitable and efficient the business is in carrying out its operations.

Here, you can find information about the business’s revenue, cost of sales, operating expenses, as well as other gains and losses. 

You’ll usually find the top line figure of a business’s income statement to be its revenue, while its bottom line figure is usually is its net income.

And between them are the business’s costs of sales, operating expenses, and other gains and losses (if there are any).

Balance Sheet/Statement of Financial Position

A business’s balance sheet lists its assets, liabilities, and equity as of the end of the reporting period.

It shows its user the current balance of assets, liabilities, and equity.

Several financial ratios are computed based on the information found on a business’s balance sheet.

For example, the current ratio uses the balance of current assets and current liabilities.

It is important to note that the balance sheet must have equal debit and credit balances.

The business’s assets comprise the debit balance, while its liabilities and equity comprise the credit balance.

This follows the accounting equation “Assets = Liability + Equity”.

Cash Flow Statement/Statement of Cash Flows

A business’s cash flow statement contains information about the inflows and outflows of its cash.

It discloses how well the business did in handling its cash, how it generated cash inflows from sales and collections.

It also shows how the business funds its operating expenses, as well as how it settles its debt obligations.

Finally, it also discloses cash inflows and outflows from investing and financing activities.

A positive net cash flow means that the business has more cash inflow than outflows.

This is generally favorable for a business.

It means that the business was able to generate a significant amount of cash inflows.

That said, a negative net cash flow isn’t always a bad thing.

It could mean that is spending more to invest in capital assets.

Statement of Retained Earnings

A business’s statement of retained earnings contains information about the movements in the business’s equity.

It is where you can find how much of the company’s profit is distributed among the business’s owners as well as how much is kept for reinvestment.