A.  The Accounting Period
To provide timely information, accounting systems prepare reports at regular intervals.

1.   Time-period principle assumes that an organization’s activities can be divided into specific time periods such as a month, a three-month quarter, a six-month interval, or a year for periodic reporting. Interim and annual financial statements can then be prepared.

2.   Annual reporting period:

a.   Calendar year—January 1 to December 31.

b.      Fiscal year—Any twelve consecutive months used to base annual financial reports on.

c.       Natural business year—a fiscal year that ends when a company's sales activities are at their lowest point.

d.      Interim financial statements—statements prepared for any period less than a fiscal year.

B.   Accrual Basis versus Cash Basis

1.      Accrual basis—uses the adjusting process to recognize revenues when earned and match expenses when incurred with revenues.  This means the economic effects of revenues and expenses are recorded when earned or incurred, not when cash is received or paid. Accrual basis is consistent with GAAP. Improves comparability of statements.

2.   Cash basis—revenues are recognized when cash is received and expenses are recognized when cash is paid. Cash basis is not consistent with GAAP.

C.   Recognizing Revenues and Expenses

1. The revenue recognition principle requires revenue be recorded when earned, not before and not after.

2.   The expense recognition principle (often called the matching principle) aims to record expenses in the same period as the revenues earned as a result of these expenses.