Accounting is the mathematical science of collecting, recording and compiling information about the financial circumstances of individuals and organizations. Accounting is intended to present end users with timely, accurate and faithful financial data in a format that communicates said data in an efficient and effective manner. One of the most basic rules that promotes this purpose is the time period assumption, which divides business activities into multiple, consecutive and distinct time periods.
Accounting rules, sometimes called generally accepted accounting principles or GAAPs, provide a guidance system that provides a shared foundational basis amongst users and producers of information in accounting. Most such rules became standardized through long-time usage, while others were created to specifically address outstanding issues. The time period assumption is one of the earliest and most basic accounting rules.
Time Period Assumption
The time period assumption is the rule that activities can be divided into separate time periods and thus be measured according to their placement in these periods. It is one of the most basic accounting principles, without which accounting as it exists could not be practiced. The time period assumption is the rule that lets accountants compile useful financial statements that gauge a business's performance across a period of time.
Accounting Under Time Period Assumption
The time period assumption separates time into distinct, consecutive periods. Transactions that occur inside each of these periods can be collected with others of a similar origin or source and then compiled to produce useful information about one aspect of the business's performance across a period of time. For example, under the time period assumption, all revenues and expenses within one month can be collected and compiled to produce that month's net income, which is the change in the business's financial circumstances from its operations. This is useful information that cannot be collected without revenues and expenses being organized into time periods for the sake of comparison and compilation.
Financial Statements and Time Period Assumption
Of the four basic financial statements, three cannot exist without the time period assumption. The balance sheet is largely independent of the time period assumption because it measures the business's condition at one specific point in time, but the income statement, retained earnings statement and cash flow statement cannot do the same because all three measure performance across a period of time. Without the time period assumption to delineate what to and what not to include in those analyses, three of the four basic financial statements would be impossible to create or use.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.