What is an accounting period?

An accounting period is an established time range where you perform and analyse accounting functions and activities. For internal reporting, an accounting period is usually one month. An accounting period is usually a calendar year or fiscal year for external reporting. 

This guide will explain how accounting periods work by covering the following:

• The different types of accounting periods
• Choosing your accounting year start and end dates
• Requirements for accounting periods
• How to keep your accounts organised and up-to-date with Countingup

Accounting periods define the time over which companies and governments take business transactions and add them to financial statements like balance sheets, cash flow statements, and income statements. Investors also use them to compare the results between different periods. 

Typically, an accounting period will follow the standard Western calendar year (January 1– December 31) that consists of 12 months. This applies to all company structures, including sole traders, limited companies, and partnerships.

In the UK, the tax year (also known as a fiscal or financial year) runs from April 6 to April 5. For sole traders and partnerships, the fiscal year starts with the official UK tax year. For limited companies, on the other hand, the fiscal year starts on the date the company was formed. 

Many companies choose to set their accounting periods to align with the fiscal year because it means they only have to prepare and file their records once per year. For example, if you registered your new limited company with Companies House (learn more here) on June 21 2018, your tax year will start on June 21 that year and end on June 20 the following year. 

For internal purposes, you can choose how long you want the accounting period to be. Most small businesses use monthly or quarterly accounting periods to stay on top of financial information.

For sole trader businesses, your accounting period will automatically end when the tax year does. Sole traders’ profits for a tax year are also decided at the accounting date in that tax year. 

But limited companies have more freedom in terms of accounting periods, so they have many things to consider when choosing a start and end date. 

First, the accounting period end date will determine when you need to pay your taxes. This means you have to make sure you have enough funds to pay what you owe to HMRC by the end of your accounting period. 

The earlier in the tax year you select as your accounting year-end, the longer you will have to pay tax on your profits for that year. This means that where your profits increase, your tax bill (the amount you owe) will rise more slowly. 

Similarly, if your profits fall, it will take longer for any reduction on your tax bill will take longer to take effect. Bear in mind that if your limited company’s profits do fall, you can change your accounting year-end date to later in the year.

You also want to think of when you need to claim tax relief on business expenses. If your accounting period ends after the tax year-end, you might not receive the relief until the following tax year. 

Finalising your financial accounts can be time-consuming, so if you can, it’s wise to choose an accounting year that ends during a time when you’re less busy. 

It’s also important to remember that the later in the year your accounting period ends, the less time you have to complete and file your tax return for your limited company. As a result, you increase the risk of incurring a penalty for late payment.

When it comes to accounting periods, there are two main principles all businesses need to follow to ensure they get it right. We’ll explain them both in detail below:

Accounting periods are there for reporting and analysis purposes, and you’ll likely want to experience consistent growth and display stability and an outlook of long-term profitability. To get the numbers right over time, you need to remain consistent with what accounting method you use and how often you update your records. 

For example, if you choose to update your accounting records at the end of every month, it’s best to try and stick to that frequency. If you update your records at random times, it’ll be more difficult to accurately determine any changes in your financial status.

The best accounting method for most businesses to use is the accrual or traditional method, where you update your accounting records whenever a financial event occurs. A financial event would be a sale, purchase, loan and loan repayment, and other business transactions. 

You update the records when the transaction is made, whether or not money has exchanged hands yet. Learn more about the accrual accounting method and how it works here.

A key accounting rule is the matching principle. The matching principle requires companies to report expenses in the accounting period along with the sales revenue earned as a result of that expense. 

For example, say you purchased a new company van that allowed you to drive around to clients’ houses. As a result, you were able to serve more clients and get paid more as a result. In this case, you’d have to report the amount you paid for the van and the extra money you made from your mobile service in the same accounting period.

You also need to ensure the financial data is as complete and accurate as possible and not spread it across multiple accounting periods.

Keeping on top of your business transactions and other financial information will make the end of each accounting period much easier. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK. Countingup saves time on financial admin and empowers you to focus on growing your business. 

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.