A fiscal year is a fundamental component of accounting for businesses and government agencies alike. Although you can define its dates according to your business needs, it’s helpful to understand more about the fiscal year meaning before creating your financial statements. Here’s what you need to know.
Understanding fiscal years
Also called a budget year, the fiscal year meaning refers to the time period used in accounting for formulating financial reports and statements. Like any year, a fiscal year lasts 12 months; however, it doesn’t necessarily have to end on 31 December.
Fiscal year vs. calendar year
A calendar year begins on 1 January and ends on 31 December. While some businesses might choose to coordinate their fiscal years with the calendar year for ease of accounting, others will opt for a different set of 12 consecutive months.
Fiscal year UK vs. tax year UK
Similarly, the UK tax year begins on 6 April and ends on 5 April of the following year. You can opt to give your fiscal year UK the same dates as the tax year if you want these records to match.
No matter which dates you choose for the fiscal year, this is the period that you should use to record all earnings and revenues. Fiscal years are often referenced by the end date in financial records. For example, for a fiscal year ending on 30 June 2019, you might say ‘FY 2019’ or ‘fiscal year ending 30 June 2019’.
Reasons to use a different fiscal year end
If you can opt to align your fiscal year end with the end of the tax or calendar year, why would you use a different accounting period? There are a few reasons to consider.
1. Alignment with government fiscal year
The first reason why you might choose to apply a different fiscal year than the tax or calendar year is to stay in alignment with your government. For example, the fiscal year for the US Federal Government runs from 1 October to 30 September. In Australia, by contrast, it begins on 1 July and ends on 30 June. If your company conducts a significant amount of business with another country, it might make sense to coordinate your fiscal year to that government.
2. Alignment with seasonal business activity
A second reason to choose a different fiscal year end is due to seasonal business activity. One example would be B2C retail businesses, which conduct the majority of trade over the holiday season throughout December and January. Rather than end the fiscal year on 31 December, it might make more sense to extend the fiscal year until 31 January to account for post-holiday sales figures. Another example would be universities, which would align their business statements with the academic calendar beginning in August or September.
3. Reduced accounting costs
In the UK, the tax year begins and ends at the beginning of April, and many businesses align their fiscal years accordingly. This makes it a particularly busy time for accounting firms, who can charge more due to increased demand. If you want to save money on accounting costs, you could switch the fiscal year end to the middle of summer, when demand is low.
The fiscal year in financial analysis
Although the fiscal year is primarily used internally to draw up your financial statements, it’s also an issue that needs to be considered by financial analysts. Investors look at the fiscal year carefully because it’s the period during which earnings and revenue is measured.
If an analyst is comparing more than one companies, each of which having a different fiscal year, sometimes adjustments need to be made. One of these is the Trailing Twelve Months (TTM) metric, which ignores the fiscal year and chooses to compare the latest 12 months instead.
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