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A while ago, we studied Financial Statements. The definition of Financial Statements is reproduced here: “Financial Statements” is a summary report that shows how a Business has used the funds invested into it by the owner, and what is its current Financial Position.
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A question now arises that when should a Business Entity prepare its Financial Statements.
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As per the Accounting Period Concept, a period (usually, a year) is decided at the start of a business, and Financial Statements are prepared after every year.
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A year, after which the Financial Statements of a Business Entity are prepared, is known as a Financial Year. It usually starts from 1st April and ends on 31st.
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This is done because a number of users of Financial Statements require the information from the accounts at regular intervals so that decisions can be taken at the appropriate time.
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Examples:
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Management requires information at regular intervals to assess the performance and funds requirement (short-term as well as long-term).
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Banks require accounting information periodically because they have invested money and have to ensure its safety and returns.
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Government of India levies Income Tax on Profits earned and they need to assess the tax from the Financial Statements.
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Therefore, an Accounting Period is the interval of time at the end of which Income Statement and Balance Sheet are prepared to know the results and resources of the business.