The fact that the year isn’t broken down into 12 months of equal size is the cause of many complications in a finance department. We can blame the Gregorian calendar for that one.
This inconvenient reality makes it difficult sometimes to compare one month’s financial results with another’s, or to plan and budget as simply as we would all like.
There are ways to simplify finances into periods of equal size – and for some organisations and industries, the preference is the 4-4-5 accounting calendar.
How does the 4-4-5 accounting period system work?
The 4-4-5 accounting calendar divides a year into four quarters of 13 weeks each.
Those quarters are themselves split into three periods, or “months”. The first and the second periods run for four weeks, then the third period is five weeks long.
In other words, the quarter goes: 28 days, 28 days, 35 days. And then the pattern is repeated in the next quarter.
Who uses the 4-4-5 calendar system and why?
The 4-4-5 accounting period is particularly popular in certain sectors, including retail, manufacturing, consumer goods distribution, hospitality and publishing.
The advantage of the system is that each period is the same length and ends on the same day of the week.
The system also makes it more straightforward to compare performance between quarters, or with the corresponding period in previous years. And it helps smooth out fluctuations in sectors where certain days of the week are traditionally busier – most obviously retail, where more shopping is done on a Saturday.
For manufacturers, the system can aid planning by helping align production schedules with the accounting period. And payroll departments often prefer the system to calendar months, because accounting periods consist of whole working weeks.
What are the drawbacks of a 4-4-5 accounting calendar?
No system is perfect and the 4-4-5 accounting calendar is not for everyone.
For one thing, it creates an accounting year that is only 364 days long. To adjust for that, it’s necessary to create a 53-week year every five or six years – making year-on-year comparisons difficult at that point.
And in the shorter term, it can lead to bills such as rent arriving twice in that five-week period.
What other accounting periods are there?
There are a host of other different accounting periods favoured by particular industries, including:
Weekly reporting (or reporting over any other short period)
A 5-4-4 accounting calendar: Another system of 13 week quarters, but with the longest “month” coming first
52-53 week fiscal year: A system where a longer financial year follows a shorter one, with the result that the “year” always ends on the same day of the week
A “natural business year” for sectors where there is a defined peak season.
Using software with 4-4-5 accounting periods and other differing calendars
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 packages.
These systems tend to be structured around dates – and as we’ve seen, 4-4-5 accounting periods and other systems were conceived to avoid some of the disadvantages of sticking to the conventional calendar.
More powerful and flexible cloud accounting software can, however, deal in periods rather than dates.
The user can define a “period” however they like. It can be one of the four-week or five-week “months” in the 4-4-5 system or it can be any other period you choose.
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, iplicit can map those conflicting periods across to the consolidated reports with ease.
Flexibility is the key here – and accounting software should bend to your preferences, rather than requiring you to do the adjusting.