A fiscal year, also known as the budget year or financial year, is a period of time utilized for calculation of yearly financial statements in businesses as well as other entities. In a number of jurisdictions, regulatory laws revolving around taxation and accounting call for such reports once every twelve months. However, it is not required that the period for which the report is due constitutes a calendar year (from 1st January to 31st December).
Fiscal years vary from country to country and from business to business. The term fiscal year may also imply the year that is used for reporting of income tax. For a company, the financial year is the fiscal year. A majority of organizations either use the last day of the calendar year or denote the last day of a quarter, which is September 30, June 30, or March 31, as the end date of their fiscal year.
Businesses need to have a fiscal year for the purpose of tax. As in the case of personal taxes, a business report is made on the total net income as of the fiscal year-end, and this becomes the basis for the calculation of tax. Moreover, the fiscal year is also the period when the organization takes stock internally and goes for determination of inventory as well as report of yearly earnings to shareholders.
Fiscal Year End
The following two criteria are involved in establishing fiscal year end dates:
- Category of business: A business which is a sole proprietorship, or is taxed as a sole proprietorship (for instance, a single-member LLC) ought to consider 31st December as the fiscal year end so that it matches the personal tax year end.
- Business cycle: For a business that is not taxed as a sole proprietorship, the end of any quarter can be chosen as the fiscal year end. A majority of organizations select the fiscal year end of the business cycle as per the industry they are in. They consider the end of the busiest time as the fiscal year end.
Companies that carry out most of their business activities in the summer season might opt for 30th September as the year end. Again one may also choose 30th September as the year end, if considerable amount of business is done with the U.S. government, so that the year end of the organization is in sync with the federal government’s year end. 31st December is apt for businesses where most of the sales take place during holidays.
Fiscal Year for Different Countries
Here is a brief idea of how fiscal year is considered in three major countries.
- UK: The financial year spans from 1st April to 31st March for government financial statements and corporation tax. For personal tax, the period runs from 6th April to 5th April.
- USA: The federal government’s fiscal year is from 1st October to 30th September of the calendar year.
- China: The fiscal year starts on 1st January and ends on 31st December, in accordance with the calendar year.