There are two main approaches to preparing interim financial statements:
- the discrete period approach and
- the integral period approach.
The discrete period approach treats each interim period as a distinct accounting period, using the same principles and processes as annual financial results to determine interim net income. Under this approach, expenses such as advertising and repairs are expensed in the interim period in which they occur.
The integral period approach, on the other hand, views the interim period as part of the annual period and uses overall estimates of the relationship between annual revenues and expenses to make accruals, deferrals, estimates, and allocations. Expenses such as advertising and research and development costs are deferred in order to allocate them properly between interim periods within a year.
According to the Accounting Principles Board (APB) opinion No. 28, interim financial statements should follow the integral period approach and be based on the same accounting principles as annual financial statements.