This concept requires that the life of business should be segregated into equal parts which are termed as Accounting Periods. This concept requires consistency of accounting periods.
This concept helps in estimating the profit or loss and financial position of a business for a particular
period. If there are different accounting periods then various problems can arise like in the calculation of profits, comparability of various incomes & expenses etc. Thus to study the results of a business, the life of a business is divided into short periods of equal length. Each such period is known as accounting period.
While true profit or loss of a business can only be determined when the business finally closes down, it would be unwise to wait for that. Accounting information is needed by all concerned on a regular basis and should, therefore, be prepared on an ongoing basis. For the purpose of having a reliable and comparable set of financial statements, the performance and position of a business is measured at the end of predetermined periods called accounting periods.
Generally, an accounting period is one year. Hence, an income statement shows the financial performance over one year while a balance sheet shows the financial position at the end of a year. This year may not necessarily be a calendar year. It may run from January to December, or from July of one year to June of the next, or from October to September.
The fact that financial statements are prepared in relation to an accounting period necessitates certain adjustments. For example, when a car is bought its cost must be apportioned over the various accounting periods in which the said will be used. The accounting period principle requires that such adjustments be judicially made and accounting record of them made accordingly.