What is Accounting Year?
The accounting year is the period of twelve months based on which an organization produces and submits its financial statements. During the period, the organization records items like revenues and expenses and calculates net income or loss for that specific period.
It can or cannot be equal to the calendar year. If it is equal to the calendar year, it runs from January 1 to December 31. Otherwise, it can be any twelve-month period defined by an authorized governing body in the country. Bulgaria is an example of a country following the calendar year as the accounting year. The year starts on January 1 and ends on December 31 for personal income taxes and corporate taxes.
Table of contents
- The accounting year refers to the twelve months timeframe that companies and governments follow continually to create, maintain and update their books of accounts, financial statements, and business reports.
- It may or may not be equal to the calendar year. Also, it may vary by nation. For example, it is different in countries like UK and US.
- Following the timeframe to prepare and keep business records is useful in understanding how the company performed in twelve months and helping investors make decisions. Similarly, the executives can make policies and better decisions.
Accounting Year Explained
The accounting year is synonymous with the accounting period, financial year, and twelve-month period. In a nation, companies or people follow the timeframe established by the central authorities. Every company that operates in any business capability has to keep track of and maintain its finances. They prepare financial statements and business reports periodically rather than preparing them when needed.
Financial statements are generally annual records since they are prepared annually and disclose the financial year followed. For example, the statements list periods like “for the year ended December 31, 2021,” indicating the financial year January to December, “for the period April 1, 2021, to March 31, 2022”, pointing to the financial year April to March. It can also be the year to date, covering the period between the start of the year and the specified date. Financial statements without the year mentioned can be misleading from an investor’s perspective.
Understanding the accounting period concept and properly prepared financials helps shareholders, creditors, and other stakeholders review company performance and growth. Current year and historical data clearly show an organization’s financial position and growth potential. Properly segmented data based on year helps managers make better business decisions and track past performances so that, based on it, they can make accurate estimations. It is vital to maintain reports and files properly; if not submitted on time or lagged in tax filing, tax audits can penalize entities.
Let us look at the following examples for better understanding:
The accounting year in India is from April 1 to March 31; India was under British rule for quite a long time. The British office practices have influenced India’s office systems and processes, so the accounting period followed by entities in India was influenced by the British accounting system. Furthermore, there are other reasons why India didn’t adopt the calendar year as a financial year. One reason is the increased sales during October, November, and December due to various festivals and the corresponding increase in complexity of accounting.
The accounting year in the US is quite different from other countries. It is from October 1 to September 30. The first fixed 12-month period or the financial year of the US was from January 1 to December 31, 1789. In 1842, it was from July 1 to June 30. The calendar year is used as the financial year by a significant number of publicly-traded companies in the US.
The UK financial year starts on April 6 and ends on April 5 of the following year for personal tax purposes. However, for government financial statements, the time frame is April 1 to March 31. The existence of both types explains the change from the Julian calendar to the Gregorian calendar. In the Julian calendar, the end of the (ordinary) year was March 25, corresponding to April 5 on the Gregorian calendar. This difference is advantageous for the people and the British government for tax collecting, auditing, and tracking. Furthermore, many large corporations in the UK use the calendar year as the financial year.
New Zealand’s accounting year set for companies and personal taxpayers is April 1 to March 31. Whereas, for the government, the period runs from July 1 to June 30. These are the standard fiscal or financial year established by their government and is readily accepted.
Frequently Asked Questions (FAQs)
A financial year is a twelve-month timeframe used by businesses, governments, and other organizations to prepare financial statements. Therefore, following the financial year is important to determine their budgets, earnings, and losses. Usually, the financial year is contrasted with the calendar year in business.
The financial year in Australia starts on July 1 and ends on June 30 of the following year. For example, the financial year 2022-2023 runs from July 1, 2022, to June 30, 2023. Businesses prepare tax returns based on the complete data collected during a financial year. Moreover, every financial year, the Australian Tax Office (ATO) collects income tax from working Australians.
The fiscal year in the United States starts on October 1 and ends on September 30 the following year. So, for example, the US fiscal year 2020-2021 runs from October 1, 2020, to September 30, 2021. Likewise, in 2021-2022 it spans from October 1, 2021, to September 30, 2022.
This has been a Guide to What is Accounting Year. We explain its examples, financial year in US, UK, Australia, India & NZ. You may learn more from the following articles –