What is Fiscal Year?
A fiscal year is a period of 12 consecutive months or a year that the government, companies and other business organizations use for accounting and reporting of their financial statements and it varies from business to business and generally, the fiscal year is started from the beginning of the quarter months i.e. January, April, July, October but even the other months can be used for starting of Fiscal year.
Explanation
Every business organization is required to prepare its financial statements and calculate the profits of the company after completion of a year and even many companies are required to publish these financial statements before the public. So all the businesses at first need to adopt the period of 12 months for which they will prepare the financials if they are allowed to choose or otherwise the fiscal year if it is prescribed in the laws as in that case the businesses are bound to adopt the same period as their fiscal year. The fiscal year can start from the first day of any month but it has to end after the completion of the 12 months period from the starting date. For example, if a company chooses January 1st as the starting date then that financial year will end on December 31st.
What does it mean to end of the Fiscal Year?
The end of fiscal year means the completion of a period of one year or the 12 months accounting period that is used by the entity for the purpose of calculation of their annual results.
Examples of Fiscal Year
- Suppose there is a business firm named AC hub that deals with the air conditioners. They find that the revenue from Air conditioners is mostly generated in the month of April, May, and June. So they are comfortable in closing books after the completion of the June period as they will get proper time for the preparations of accounts at lower costs and also they will get the benefit of reporting the last quarter sale as the highest so in such a case Ac hub will opt for the Fiscal year that will start on July 1st and will end on the June 30th that will fall in the following calendar year.
- Another example is of a grocery shop that exists at the very lower level but the owner of the shop wants to get their accounting done with the experts a low cost so for him choosing the calendar year is not a good option because that will be the peak season for the experts and chances of getting an expert at minimal cost is almost nil. So the best option for him is to choose a year apart from calendar year that can be the year starting from April 1st and ending with March 31st or year starting from any other month apart from January.
Federal Government Fiscal Year: The federal government fiscal year starts from October 1st and ends on September 30th.
Fiscal Year vs. Calendar Year
The difference between Fiscal Year and Calendar Year is as follows:
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- This can be any consecutive period of 12 months i.e. it can start from 1st day of any month and ends on the last day of the month at which the period of 12 consecutive months is completed whereas Calendar Year is a fixed period of 12 months that start from January 1st and ends on December 31st.
- In case of the organizations/companies that follow fiscal year and make changes in the period of fiscal year, the accounting and auditing becomes difficult whereas if one choose for calendar year always then understanding, recording and auditing of financial transactions becomes easier.
- This can vary from country to country or from the business to business depending upon the nature of business but calendar year is same worldwide.
- this doesn’t brings uniformity as there is a possibility that you follow different fiscal year than your clients, suppliers or agencies of government whereas Calendar year brings uniformity as it is same for all the businesses that exists.
- If you use fiscal year that is not very commonly used by other enterprises then you can easily hire professionals like tax or accounting experts at the end of the Fiscal year at lower cost as that will be the off season for those experts whereas calendar year can be commonly used by the enterprises so hiring professionals during the end of calendar year would be expensive.
Benefits of Fiscal Year
- This is beneficial for the corporations if by adopting another period of 12 months rather than calendar year months they can get various tax benefits thereby reducing their tax burdens.
- The business cycle of the company is sometimes the deciding factor of the fiscal year. This provides business an opportunity to close their books on some different month of the year because if closing books in calendar year was the only option for the organizations then they are required to always close books in the month of December.
- This is not commonly used by the different organizations can be beneficial for you as it allows you to negotiate with the accounting and tax experts and easily convince them to provide you the services at reduced cost as the work load of those professionals would be less during that period of time.
- Usually, the companies think that the financial results should end with the quarter that provides the best profits to the company. Using the different year than calendar year helps the businesses to use such period of one year whose ending day is same as that of the quarter’s ending day
Conclusion
Thus, Fiscal year is the consecutive period of 12 months that is used by the different organizations for the financial reporting of transactions. Organizations are given the right to choose the 12 months period as per their choice and are in no obligation to adopt the calendar year as the 12 months reporting period. The deciding factor can be the operating cycle of the business or nature of business. Opting for fiscal year can sometimes bring difficulty when the investors are required to evaluate and compare the businesses that are having different fiscal years. If the calendar year is adopted as a fiscal year then we can see the uniformity in the reporting periods of all the businesses worldwide.
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