In accounting, it’s standard to generate reports on a monthly basis. However, if you have a business where it’s important to compare performance by exact periods, monthly reporting has some limitations. For example, the number of days in each month varies so comparing your January performance to February is not exact. And comparing a month against the same month in a previous year will give you an equal number of days, but you’ll find that the number of high volume days is likely different (such as weekends for retailers and restaurants).
Your company might be able to achieve more meaningful comparison periods by adopting a 4-4-5 week accounting period. This method of accounting divides each quarter of the year into three monthly periods consisting of two 4 week “months” and one 5 week “month,” hence the name. The four week “months” each have 28 days and the one five week “month” has 35 days.
Another non-standard accounting period, and a different version of the 4-4-5 model, is the 13 week accounting period. This model consists of 13 different 28 day accounting periods.
Restaurant chains and retail stores often use 4-4-5 week and 13 week accounting methods to be certain their sales comparisons are precise. Additionally, if you pay your employees bi-weekly, you can more easily compare labor costs by aligning your pay periods within the 28 day periods. You can also set your inventory count on the same day each period so comparability and scheduling is simpler.
Despite the benefits of using these non-standard methods of accounting, there are challenges as well.
Expenses are usually billed monthly. If you use one of these non-standard periods of accounting and want to make sure your expenses are recorded properly for each period, you will need to project total expenses for the year, divide by 13 and record across the periods. In this scenario, your recorded expenses are based on projections and may need to be adjusted periodically.
Bank statements are sent monthly. It’s more straightforward to reconcile your bank statement to a monthly period, but some banks will change your statement period upon your request. If you receive online statements, you can easily create your own period and reconcile on that schedule.
Sales tax is also paid monthly. Most states require you to report and remit sales each month so monthly reporting is simplest. In recent years, more and more states have started allowing businesses to report sales by periods instead of by month, in order to accommodate non-standard reporting periods.
And lastly, there is the calendar year-end date. If you use 4-4-5 accounting periods, it is likely that your last calendar day is something other than December 31st. Your year might end, for example, the last Sunday in December or even in January. The IRS allows you to acquire a non-traditional year-end, however you will need to file the proper forms notifying them of the change.
There are certainly challenges to using the 4-4-5 week or 13 week accounting periods, but they are becoming more practical as banks, states and the IRS continue to become more accommodating to these non-standard methods. There are still people who feel that the costs of the 4-4-5 week or 13 week accounting periods outweigh the benefits. BookKeeping Express (BKE) recommends you consult with your tax accountant and determine how changing your accounting periods might affect your specific business.