Advantages of Adopting the Fiscal Year

accounting applicationBusiness entities have the option of reporting their income and expenses based on the traditional calendar year or on a customized 12-month period referred to as a fiscal year (FY).

Due to seasonal or cyclical sales volume, some industries may benefit from operating on a fiscal year. This method may allow them to reduce their tax burden by spreading income and expenses throughout the same cycle.

While fiscal years do not have to follow the calendar year of January 1 through December 31, they must consist of 12 consecutive months. Any month can be used to start a fiscal year, but the year must end on the last day of the 12th month. 

A business may find that using the fiscal year for accounting, reporting, and budgeting purposes can offer several benefits over using the traditional calendar-year reporting. Using an accounting application such as bookkeeping software can especially help business owners keep track of their progress throughout the fiscal year. They can simply enter the dates of the fiscal year into the accounting application and quickly run reports.

Businesses can be considered calendar-year taxpayers or fiscal-year taxpayers. Sole proprietors report their business income on a Schedule C, which is part of a personal tax return. This means, in most situations, sole proprietors must operate using the calendar year to match the tax year required by the Internal Revenue Service (IRS) for personal tax filing. Other business entities, however, may have the option of establishing and following a fiscal year that is of more benefit to the cyclical ups and downs of their unique business.

Industries that see seasonal increases or decreases in net income can benefit from structuring their accounting and financial reporting around a fiscal year that corresponds with their seasonal changes. For example, ski industries generate most of their business during the winter, and retail stores tend to have a surge in sales around the winter holidays. Both industries can benefit from using a fiscal year by posting their higher seasonal purchases and employee expenses against their soaring income.

For example, the retail industry normally hires additional employees to help with their winter holiday sales and January inventory clearance sales. Since businesses can operate under the Cash basis, Accrual basis or Hybrid method of accounting, the income and expenses for a retail business may not be reported in the same month the related income was generated. By ending their fiscal year shortly after their strongest sales period (December and January), retailer businesses have the opportunity to reduce tax obligations by ending their fiscal year on January 31st.

A fiscal year is identified by the calendar year in which the fiscal year ends. For the retail business used in the prior example, fiscal year 2014 (FY 2014) will operate from February 1, 2013 through January 31, 2014.

 

Avatar

We provide fast, simple, and affordable accounting and payroll software. After a rough start-up experience, we know first hand what small businesses need in order to breakthrough and achieve success. So we created a software service to help you keep the two things you don’t have enough of… time and money.

Leave a Reply