The fiscal year definition: A fiscal year is a financial year made up of 12 consecutive months that can begin with any month – it doesn’t have to be January.
During this time period a business will up-date their bookkeeping records.
At the end of the fiscal year, income tax will be calculated on the results of those 12 months of trading.
No business can operate (by law) for more than one fiscal year without calculating and paying their taxes to the government (unless they get a special extension of time).
All countries have a common fiscal year set by their own tax authorities.
Most countries run from 1 January to 31 December for tax purposes (see which ones below).
Some countries run from 1 April to 31 March (see which ones below).
Then there are others like the UK which start with an odd date like 6 April and in South Africa individual taxes start from 1 February.
See a complete chart of countries here.
The common calendar year is:
By this we see that a fiscal year can be different to a calendar year for tax and financial purposes.
No, a fiscal year does not start on the date a business starts operating (unless the business starts on the first date of the fiscal year).
If your business starts operating on – let’s pick a random date - 11 July, but your tax obligated fiscal year is 1 January to 31 December, your business year is 1 January to 31 December not 11 July to 10 June.
Now, having started on 11 July means you will be operating for nearly six months in that fiscal year, up to the end of December...
…and you must process your end of year bookkeeping when December is finished, and file and pay your income taxes on those six months of trading.
The cycle starts again with your new fiscal year on 1 January. Your second year of operating will be for a full 12 months.
A business can apply to the tax authorities to have their business fiscal year start and end with months that are different to the set fiscal year because of the timing of their busiest season and to suit their natural business year.
This way the business doesn’t have to process their year-end procedures right in the middle of their busy season, and it will enable the year-end reporting to include the full financial results from the busy season within that one fiscal year, rather than having it spread over two fiscal years.
An example is New Zealand.
Their common fiscal year runs from April to March but vineyards and wineries, and all related contractors, are very busy during that time period because of the grape harvest season, so the best fiscal year for them could start with July.
This way, their natural trading period is July to June and the busy February to May season can be included in that year’s fiscal results.
A fiscal quarter is made up of 3 months of the year.
There are four quarters in a fiscal year.
Some businesses elect to publish all their important bookkeeping reports every quarter, and then they can compare quarters for the same period in the following year to see if trading has improved.
The quarters for a calendar year would be:
If your fiscal year starts in July, these will be your quarters:
If your fiscal year starts in February, these will be your quarters:
Once a fiscal year has ended the bookkeeping records can be finalized and income tax calculated.
See End of Year Bookkeeping Tips
You don't have to hold off starting your bookkeeping records for the new financial year just because you haven't finalized your previous fiscal year.
The bookkeeping process allows for the month to month carry over from the old year to the new year no matter what stage of finishing up the old year you are in.
The fiscal year, and its months and quarters, form a good structure in which to produce financial reports out of the business bookkeeping records.
It helps the small business owner or the bookkeeper to pull the data together into time periods that can be compared with one another to track if the operating results are improving or declining.
A good example are the Profit and Loss Report (Income Statement) and Balance Sheet.
Every time a month of data has been updated, the above two reports can be produced, and a lot of bookkeeping programs provide the capability of making all sorts of different reports.
Here are some examples from Xero Accounting using their Demo account.
First, you can select the period of time you want to look at, below I've selected This Financial Year, which also means This Fiscal Year.
Then you will select how many of similar previous time periods to compare with. Here I have selected 3 previous periods - and because I've selected This Financial Year, the previous 3 periods will be the previous Financial Years.
Here is what the report looks like for the financial year comparisons
If I had selected Last Month within this fiscal year, and ticked the box to compare with the previous 3 Periods, below is what the report looks like. This report compares June, May and April. We can see that the Demo company did not do well in sales in June compared with May!
Home > Bookkeeping Terms > Fiscal Year Definition
Leave me a comment in the box below.