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The accounting entity is viewed as a going concern and is expected to have a fairly long life. To determine the exact profit or loss of a business enterprise one needs to find that realizable difference between the end value of equity at closure and the investment in the business by the owners. The real value can be determined only when the enterprise is liquidated. But the owners need to know the profitability of the business on an ongoing basis to make informed business decisions. Hence, to overcome this problem, the accountants have developed the “Concept of Periodicity” for reporting the periodical progress of a business entity. This period for which the enterprise is determining and reporting its operating profit is the accounting period.
Generally, the accounting period consists of 12 months but we see differences in the way different organizations define their accounting period. There exist multiple reasons for the same. Some industries like banking need to maintain their average daily balances. They need to define their transaction calendars specifying each valid business day for which the average balances need to be calculated and maintained in the General Ledger.