A fiscal year is any 52-week period used consistently by an organization for the purposes of financial reporting and policy setting. It may or may not correspond with the typical calendar year of January to December. A company may choose to designate a different time period as its fiscal year as a way of recognizing seasonal variations in its business, as a method of minimizing its tax burden, or for any number of other reasons.
Fiscal years are used by companies as the basis on which to report financial information. To be useful, information must reach decision makers frequently and promptly. To provide this timely information, accounting systems are designed to produce periodic reports at regular intervals. As a result, the accounting process is based on the time period principle.
According to this principle, an organization’s activities are identified with specific time periods, such as a month, a three-month quarter, or a year. Then, financial statements are prepared for each reporting period. The time periods covered by the reports are called accounting periods. Most organizations use one year as their primary accounting period and prepare annual financial statements. However, nearly all organizations also prepare interim financial reports that cover one or three months of activity.
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How Fiscal Year Periods Are Determined
The annual reporting period or company’s fiscal year is not always the same as the calendar year ending December 31. In fact, an organization can adopt a fiscal year consisting of any 12 consecutive months. An acceptable variation of this rule is to adopt an annual reporting period of 52 weeks.
Companies that do not experience much seasonal variation in sales volume within the year often choose the calendar year as their fiscal year. On the other hand, companies that experience major seasonal variations in sales often choose a fiscal year that corresponds to their natural business year. The natural business year ends when sales activities are at their lowest point during the year. For example, the natural business year for retail merchants ends around January 31, after the Christmas holidays and the January pre-inventory selling seasons. As a result, retailers often start their fiscal year on February 1st each year.
The federal budget of the U.S. Government extends from October 1, 2000, to September 30, 2001. This period encompasses the government’s fiscal year. In another example, the State of Texas has designated a fiscal year that extends from September 1, 2000, through August 31, 2001. Texas uses this fiscal year for financial reporting and for establishing basic policies, such as those setting the base fares for travel on state business.