Why irregular accounting periods can confuse some finance software
The fact that calendar months vary in length is a source of irritation for many a finance department – as well as to anyone who works with monthly targets. For some organisations, dividing the year into standard months and quarters skews the books so awkwardly that they opt for another system entirely. There are several ways of splitting an accounting year into uniform periods which finish on the same day of the week. The most common is the 4-4-5 calendar. It makes a lot of sense for the organisations that adopt it, but it can sometimes confuse your accounting software.
Who uses the 4-4-5 accounting calendar and why?
The 4-4-5 calendar system divides a year into quarters of 13 weeks. Each of those quarters is further divided into three periods or “months”. The first runs for four weeks, the second also runs for four weeks, and then the third lasts five weeks. Sectors that often adopt this system include retail, manufacturing, consumer goods distribution, hospitality and publishing. The advantage is that each period ends on the same day of the week and each quarter is directly comparable to the other quarters of that year or other years. The system helps iron out fluctuations for sectors where certain days of the week are normally busier. That has been a problem for the retail industry, where Saturdays are traditionally the busiest days and having five of them in one month will skew the figures. In manufacturing, the 4-4-5 calendar can aid planning by helping align production schedules with the accounting period. Payroll departments often prefer the system to calendar months, because its accounting periods consist of whole working weeks.
The drawbacks of the 4-4-5 accounting calendar
While it solves some problems, the 4-4-5 calendar has its drawbacks: It creates an accounting year only 364 days long. As a result, it is necessary to have a 53-week “year” every five or six years, making year-on-year comparisons difficult at that point. More pressingly, it can lead to bills such as rent arriving twice in the five-week “month” each quarter.
Software that can handle 4-4-5 accounting periods
Working with a 4-4-5 accounting period – or any other system that doesn’t match the conventional calendar – can present a challenge to entry level accounting software, which tends to be built around dates. More powerful and flexible accounting software can, however, deal in periods rather than dates. The user can define a “period” however they like – as one of the four-week or five-week “months” in the 4-4-5 system or any other length of time required. The same is true when it comes to consolidating accounts for groups of entities. If some subsidiaries have different year-end dates from other parts of the group, for instance, software should be able to map those conflicting periods across to the consolidated reports with ease. Thanks to the uneven months of our Gregorian calendar, there is no way to organise the financial year to suit everyone. But good software should be able to adapt to whichever system the user chooses – not force the user to follow its systems.
iplicit’s cloud accounting software for medium-sized businesses can easily accommodate different accounting calendars by allowing the user to define a “period”.
To find out more about iplicit, watch a webinar about moving to a modern cloud finance system or visit iplicit.com.