Financial Year

Financial Year Accounting Period Corporation Tax Budget Fiscal Year Tax Rates
An in-depth overview of the financial year, including definitions, examples, related terms, online resources, and suggested reading materials.
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Definition

Financial Year

1. Any year connected with finance, such as a company’s accounting period or a year for which budgets are made up.

2. In the UK, a specific period relating to corporation tax, i.e., the 12 months beginning on April 1 in one year and ending on March 31 in the next year. Corporation tax rates are set for specific financial years by the Chancellor in the Budget; if a company’s accounting period crosses two financial years, the profits must be apportioned to the relevant financial years to determine the applicable tax rates. Compare: [fiscal year]

Examples

  1. Corporate Financial Reporting: A company in the UK planning its annual report for the year ending March 31, 2022, will base its financial year from April 1, 2021, to March 31, 2022.
  2. Tax Calculation: A corporation with an accounting period of January 1, 2021, to December 31, 2021, will need to apportion its profits between two financial years for corporation tax purposes: April 1, 2020, to March 31, 2021, and April 1, 2021, to March 31, 2022.

Frequently Asked Questions (FAQs)

What is a financial year?

A financial year is a specific 12-month period used for accounting purposes and financial reporting. It does not always align with the calendar year.

How does a financial year differ from a fiscal year?

While the terms are often used interchangeably, a fiscal year typically refers to a 12-month period set by each country or organization for accounting and tax purposes. For example, in the U.S., the fiscal year runs from October 1 to September 30.

Why is the financial year important?

The financial year is crucial for organizing financial statements, budgeting, and determining taxable income and applicable tax rates.

How is a financial year determined?

In the UK, the financial year for tax purposes runs from April 1 to March 31. However, companies can set their own accounting periods, provided they comply with legal requirements and apportion profits across financial years if needed.

What happens if a company’s accounting period spans two financial years?

The company must apportion its profits between the two financial years to determine the correct tax rates applicable for each period.

  • Accounting Period: The span of time covered by financial statements, typically one year.
  • Corporation Tax: A tax imposed on the net income (profit) of a corporation.
  • Fiscal Year: Any yearly period used for accounting purposes; for example, the United States government’s fiscal year starts on October 1 and ends on September 30.
  • Budget: A financial plan for a defined period, often one year, that includes planned revenues and expenditures.

Online References

Suggested Books for Further Studies

  • “Intermediate Financial Accounting” by Glenn Arnold
  • “Financial Accounting” by Robert Libby, Patricia Libby, and Daniel Short
  • “Taxation of Corporations and Shareholders” by Boris I. Bittker, James S. Eustice

Accounting Basics: “Financial Year” Fundamentals Quiz

### What defines a financial year? - [ ] It is always the same as the calendar year. - [x] It is any 12-month period connected with finance or accounting. - [ ] It must start on January 1 and end on December 31. - [ ] It varies each month depending on the company's preference. > **Explanation:** A financial year is any 12-month period used for accounting and finance purposes, which does not necessarily align with the calendar year. ### What is the financial year period for corporation tax in the UK? - [ ] January 1 to December 31 - [ ] April 5 to April 4 - [x] April 1 to March 31 - [ ] October 1 to September 30 > **Explanation:** In the UK, the financial year for corporation tax runs from April 1 to March 31 of the following year. ### Why might a company's accounting period be different from the financial year? - [ ] To simplify bookkeeping. - [ ] To align with operational cycles. - [x] To better match its business or operational timelines. - [ ] To avoid paying taxes. > **Explanation:** Companies may choose an accounting period that matches their business or operational cycles, which may not align with the financial year. ### What must a company do if its accounting period spans two financial years? - [ ] Report only one financial year's taxes. - [ ] Adjust the end date of the financial year. - [x] Apportion the profits to the relevant financial years. - [ ] Ignore any mismatched periods. > **Explanation:** If a company's accounting period spans two financial years, it must apportion profits to the relevant financial years to properly calculate applicable taxes. ### Which term is often used interchangeably with financial year? - [x] Fiscal Year - [ ] Calendar Year - [ ] Budget Year - [ ] Operational Year > **Explanation:** The term "fiscal year" is often used interchangeably with "financial year" to describe a 12-month accounting period. ### For a UK company, what period would the financial year 2021/2022 cover? - [ ] June 1, 2021, to May 31, 2022 - [ ] January 1, 2021, to December 31, 2021 - [x] April 1, 2021, to March 31, 2022 - [ ] July 1, 2021, to June 30, 2022 > **Explanation:** For a UK company, the financial year 2021/2022 covers the period from April 1, 2021, to March 31, 2022. ### What period does the U.S. federal government fiscal year cover? - [x] October 1 to September 30 - [ ] January 1 to December 31 - [ ] April 1 to March 31 - [ ] July 1 to June 30 > **Explanation:** The U.S. federal government fiscal year runs from October 1 to September 30. ### How often does a company typically choose its accounting period? - [ ] Every six months - [ ] Quarterly - [ ] Weekly - [x] Annually > **Explanation:** Companies typically choose an accounting period annually to align with the financial year or their business cycles. ### Can a financial year align with a calendar year? - [x] Yes - [ ] No > **Explanation:** A financial year can align with a calendar year, but it is not a requirement. Companies have the flexibility to choose their financial year based on their specific needs. ### What role does the Chancellor play in the UK's financial year? - [x] Sets corporation tax rates for financial years in the Budget. - [ ] Determines individual employees' tax rates. - [ ] Manages company accounting submissions. - [ ] Approves all fiscal year plans. > **Explanation:** In the UK, the Chancellor sets corporation tax rates for financial years in the Budget.

Thank you for joining us in exploring the concept of a financial year. Continue to expand your financial knowledge and improve your accounting proficiency!

Tuesday, August 6, 2024
Financing
Financial Supermarket
Fiscal Year January 1, 1
Accounting Period January 1, 1
Accounting Period January 1, 1
Accounting Reference Date (ARD) January 1, 1
End-of-Year (EOY) January 1, 1
Finance Act January 1, 1
Financial Period January 1, 1
Gross Corporation Tax January 1, 1
Marginal Relief (Small Companies Relief) January 1, 1
Period of Account January 1, 1

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