As mentioned in the http://flask.pocoo.org/docs/patterns/packages/ documentation in a flask app architecture like a package you get a directory structure that looks like :
/yourapplication
/yourapplication
/__init__.py
/static
/style.css
/templates
layout.html
index.html
login.html
/views
/__init_.py
...
...
And you put most of your code withing you __init__.py
files so that you can call your views and application as modules of your package.
But as mentioned here you are still using application.py file which doesn't seems to be a part of package.
Also While working in a architecture like this you need to be very careful about circular imports as mentioned on the same link near the end of the webpage.