While preparing financial statements and accounting purposes, a company uses a period which is referred to as the fiscal year. It may not be the same as the regular calendar year. A calendar year (CY) starts from 1st January and ends on 31st December of a year. However, the fiscal year (FY) can start at any time during the year. It is referred to as that time when the company commences its books of accounts for a particular year.
It is to be noted that the fiscal year varies across countries. In some countries, the fiscal year is the same as the calendar year, that is First January to thirty-first December, for example, China and France. In the US, the federal government’s fiscal year commences on October and terminates in September of the following year. The state governments draft their won fiscal year. In Australia, the fiscal year starts on first July and ends on the thirty June of the next calendar year.
Companies can either use calendar-year or fiscal-year for tax purposes as per the Internal Revenue Service. However, as the convention goes, the use of the fiscal year is generally seen during the discussion of budgets. Fiscal years are very common and referred to for the budget purpose since it is a convenient period convention used as a reference while comparing the financial performance of the government or a company.
Sometimes companies may prefer to follow a fiscal year rather than the use of a calendar year. This convention is followed if the fiscal year better matches or is in line with their natural business cycles. As an example, educational institutions, generally prefer to follow fiscal years of July 1 through June 30. Since this time frame captures all the activities within an educational institute and represents the true picture.
On the other hand, retailers would prefer to end their fiscal year on 31st January. Generally, the month of December tends to be a very busy month for the retail space on the back of the Christmas holidays. As a result, often huge revenue inflow is experienced during this season, also based on experience it is observed in the month of January retailers have to deal with the return of unwanted gifts, and hence it is logical to conclude the fiscal year in January so that the retailers get a true and more reliable financial picture.
Seasonal businesses also are in practice of using fiscal years. If a company has more revenues during a season, let’s say spring and incurs most of its expenses during the winter, then a fiscal year ending in the month of the corresponding months in July or August might be more reflective rather than using a period end of December.
Business houses can save on accounting and auditing using a fiscal year. It is observed that a lot of companies and entities follow 1 Jan to 30 Dec time frame, for accounting and auditing purposes, demand for the professional tax and accounting individuals tends to be high during this period. Hence, the use of the financial year is encouraged in the business community.
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