Companies are setup to run for the long term business operations. But as far as the reporting of financial transactions are concerned, we need to do that over a certain time period such as monthly, quarterly, half yearly and annually. This principle is also called time period assumption.
In order to help out the users of financial statements, you must write Quarter ended 30 June 2015 or like that in the header of income statement (profit & loss account) and as at 30 June 2015 in the header of balance sheet (also called statement of financial position). This informs the users about the time period for which the financial statements have been prepared.
Example
ABC is involved in FM Radio industry. It is in the business for 10 years. There are hundreds of transactions which are occurring in all of its 16 branches including the head office. Each branch has its accountant which does all petty cash expenses and do bank reconciliation. The head office managed the accounting of the branches by continuous monitoring the branches’ expenses and revenues crediting into the branch bank account. Every month, the records of each branch are closed and income statement, balance sheet, statement of changes in equity & cash flow statements are prepared.
Time period principle emphasizes that each month; all accounting reports must mention the time period to which they relate. This ensures that all the stakeholders are well aware of the time covered by the financial reports and could make their decisions accordingly.
In short, any financial report without following the time period principle is just a useless thing because no one can make decisions over the data available because time is the most important thing. If it is not there, nothing is doable.
Example
T Services is engaged in proving local cable network to few areas of the city. Some of its customers pay advance payment for 03 month (April to June) in March. T Services cannot include this amount into its revenue for the month of March because these are not March revenue. Instead, it would record this as current liability over its balance sheet. When the month of April will come up, it will debit portion of April revenue from this liability and record the revenue. The financial reports of T Services must mention the time period for which they relate to enable the stakeholders make appropriate decisions.