Definition of Fiscal Year
A fiscal year (also known as a “tax year” or “year of assessment”) is a one-year period that companies and governments use for financial reporting and budgeting. The fiscal year is distinct from a calendar year and may not align with it. In the UK, the fiscal year begins on 6 April and ends on 5 April of the following year. For example, the fiscal year 2021-22 runs from 6 April 2021 to 5 April 2022. In contrast, in the USA, the fiscal year runs from 1 October of one year to 30 September of the following year.
Key Points:
- The fiscal year is used to ascertain annual tax liabilities, allowances, and government budgets.
- For accounting purposes, a fiscal year allows organizations to prepare annual financial statements.
- Different countries have different fiscal year periods and regulatory expectations.
Examples
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UK Fiscal Year: The fiscal year in the United Kingdom starts on 6 April and ends on 5 April of the next year. Thus, the fiscal year 2021-22 spans from 6 April 2021 to 5 April 2022. This period is used for income tax, capital gains tax, and inheritance tax calculations.
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USA Fiscal Year: In the USA, the federal government uses a fiscal year that starts on 1 October and ends on 30 September of the following year. For instance, FY2022 runs from 1 October 2021 to 30 September 2022.
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Corporate Fiscal Years: Many companies set their own fiscal years that may differ from the calendar year. For example, a company may choose a fiscal year ending on 31 March if it aligns better with its business cycle.
Frequently Asked Questions (FAQs)
Q1: Why don’t all organizations use the calendar year as their fiscal year?
- A1: Organizations choose a fiscal year that aligns best with their operational cycles, industry standards, or for tax optimization reasons. This flexibility helps in accurate financial planning and analysis.
Q2: How does a fiscal year affect personal taxes?
- A2: Personal income taxes are calculated based on the designated fiscal year periods, such as 6 April to 5 April of the following year in the UK.
Q3: Can a company’s fiscal year differ from the government’s fiscal year in its country?
- A3: Yes, companies can select fiscal years that differ from the government’s fiscal year to better match their business cycles.
Q4: What happens if a company decides to change its fiscal year?
- A4: Companies can change their fiscal year but must typically seek approval from tax authorities and make amendments to their financial reporting processes to reflect this change.
Related Terms
- Financial Year: Often used interchangeably with “fiscal year,” a financial year is any 12-month period used for accounting purposes.
- Accounting Period: A span of time at the end of which a company prepares its financial statements, which can be a fiscal quarter, half-year, or entire fiscal year.
Online References
Suggested Books for Further Study
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield: For an in-depth study of accounting principles including fiscal years.
- “Financial Accounting” by Robert Libby, Patricia Libby, Daniel G. Short: A comprehensive guide on financial reporting and accounting cycles.
- “Understanding Taxation: A Primer on the UK and US Systems” by Various Authors: Insight into how different countries handle tax years and fiscal periods.
Accounting Basics: “Fiscal Year” Fundamentals Quiz
Thank you for enhancing your accounting knowledge with our structured fiscal year fundamentals and testing your understanding through these quizzes!
