When the year begins, everybody makes their New Year goals and resolutions. Finances are a common focus when it comes to New Year resolutions. Companies, businesses, corporations, and governments do the same thing. They plan their financial allocations for the year. Financial statements from the previous tax year are used to provide information on the position of the company and its performance all year round. A company may plan its business around the calendar year, or it can have a unique fiscal year. Let's look at fiscal year vs calendar year.
A fiscal year is a period that a company, a business, an organization or any government uses for accounting purposes, and to prepare a financial statement. It is made of 12 consecutive months that end on any last day of the month except December. The main purpose of fiscal year statements is to determine and discuss budgets. They also offer a chance to find out how the organization has been performing. Some companies like Walmart and Target Corporation use fiscal years because December is their busiest month.
A calendar year is a period of 365 or 366 days duration period that begins on January 1 and ends on December 31. A calendar year is commonly based on the Gregorian calendar. Most companies base their financial year on the calendar year system. It is actually the most common financial year in the business world. Example of companies that use the calendar year include Alphabet Inc., Amazon.com, and Facebook.
Fiscal Year Vs Calendar Year
Some people tend to think that fiscal year and calendar year are the same. Others think both have a one-year duration. The differences are quite clear. The main difference is that a fiscal year refers to a business accounting period while a calendar is just the normal year. The difference matters. If companies had to start their financial year at the same time as the calendar year, they have to wait until January 1st to conduct official business, which would be a great inconvenience. The fiscal calendar allows companies to begin their operations when they are financially prepared to.
The Internal Revenue Service (IRS) requires you to notify them of your chosen tax year. The IRS requires you to pay your taxes after you figure your taxable income based on your tax year whether you use a fiscal year or a calendar year. If you file your first tax returns using the calendar year and you later start a business as a sole proprietor or become a partner in a partnership, you must continue to use the calendar year. You need to get a new IRS approval to change it.
To get the approval, you must file form 1128 which has all the recommendations to ensure you qualify to get the approval. You also have to pay a user fee as per the requirements.
A fiscal year is used for tax purposes. It is also used to determine filing dates and due dates for extensions. They majorly rely on seasonality. Seasonality is characteristic of a time series in which data experiences regular and predictable change every calendar year. Any predictable fluctuations or patterns repeat over a one- year period. Seasonality can be used to analyze stocks and economic trends. Seasonality greatly determines certain business decisions, such as inventory and staffing.
A good example is in retail sales. During peak seasons a lot of purchases are done, and it is usually during predictable times of the year, for example, in December.
Choosing a fiscal year depends on two things:
Type Of business
A sole proprietor or a personal business is taxed as a single entity and must use a December 31st fiscal year- end to match personal tax year end.
If your business is not taxed as a sole proprietorship, you can choose the end of any quarter to be your fiscal year end. Most companies choose the end of the busiest time for their end year, for example, September 30th after summer.
Fiscal Year Vs Calendar Year: 9 Differences
- A fiscal year comprises 12 consecutive months ending last day of any month except December while a calendar year has only one year beginning from January 1st and ends December 31st.
- The fiscal year calendar tries to conform with seasons. Due to seasonal sale volumes, some industries benefit since fiscal years allows spreading income and expenses over the same sales cycle and match revenue cycle whereas the calendar year has budgeted for the whole year. For sole proprietors and small business owners, the financial calendar year is perhaps more simple and easier since the tax reporting is easier when tax year matches up with that of the business owner.
- Businesses that solicit investments prefer a fiscal year since it helps them ease the tax burden.
- Fiscal year saves money in accounting and auditing fees. Many companies follow the calendar year for auditing. Most auditors are in high demand in months leading up to December 31st. Since the auditors are not very busy at other times, the companies that have a fiscal year gets them eventually at a negotiable fee. This potentially saves money for the company.
- Corporations get to decide their fiscal year depending on their tax returns, unlike when using the calendar year.
- The fiscal year is used by businesses to organize their records in a way that relates to reflects the highs and lows of sales.
- The calendar year is mostly used by small businesses or sole proprietors who value its simplicity. They prefer it because it goes hand in hand with the calendar year, which they follow when paying individual taxes.
- The IRS lets you use the calendar year when you do not keep any formal records.
- The calendar year is also used when the tax does not qualify as fiscal tax as per the regulations of the IRS.
Fiscal Year Vs Calendar Year In Different Countries
Each country has its own fiscal year. For example, the UAE, Ireland, Sweden, China, and Portugal have their financial years beginning at the same time as the calendar year. The US fiscal year begins in October 1st and ends on September 30th the following year. The UK fiscal year begins on April 6th and closes on April 5th of the following year. Schools and retailers end the fiscal year on January 31st.
Laws and jurisdictions require company financial reports to be prepared and published yearly. Taxation laws require accounting records to be maintained and taxes calculated on an annual basis and to correspond to the fiscal year used for government purposes.
Why Is Financial Information Important?
Understanding Fiscal Year Vs Calendar Year
Keep It Simple
When deciding on what budget year to use, ensure to keep it simple. Many use the regular calendar year as a measurement for accounts and finance purposes. Calendar years are simple and match many requirements for individuals.
When Fiscal Year Makes Sense
Some people believe that using a fiscal which is different from a calendar year distorts accurate measurements. However, it proves worthwhile for business activities that tend to pick up toward the end of the calendar year. A calendar year would split up the most important time of the year for such businesses.
4 Purposes Of Tax Year Budgeting
1. Forecast For Income And Expenditure
Budgeting is important in planning. Business owners and managers need to be able to predict whether a business will make a profit or not. It provides the model on how the business might perform. It helps managers to estimate the profitability of their companies.
2. A Tool For Decision Making
It provides a financial framework for decision making. You get to make an informed decision on which expenses to continue spending on or which investments are lucrative at that moment. It also helps to determine your personnel. If you're running on a tight budget, you would have to let go of some of your personnel according to their productivity in the company.
3. Monitoring Business Performance
This allows forecast. A business is considered profitable by measuring it in terms of profits and return on investment. It is performing well when the amount of money invested by the owners generates a profit that is substantially more than the amount invested in interest earning. A good look at the finances helps to monitor the performance progress during the year.
4. Government Budgets
The government is one of the main entities that take the tax year into great consideration. Most governments prefer fiscal year accounting systems. Some of the reasons for government budget include:
The government can make decisions on provisions to increase the budget spending or whether to invest money in order to accelerate the country's economy. In case if inflation, they would rather reduce their spending, and in case of deflation, they can increase their spending.
Give Businesses Direction
Some companies fully rely on the government for their projects to run. For example, those that rely on infrastructure, road, agriculture, and the rural sector. Government budgets allow them to also plan accordingly.
Budgeting helps reduce the country's income disparity. This ensures there is a balance in income, and everyone can sustain themselves.
Annual budgeting helps to take care of the public sector units. This ensures all the utilities are operational and are accessible to the people.
The government is able to iron out heterogeneity. They plan on setting up industries in areas that are marginalized and help create employment to improve the quality of lives of the countrymen. In order for a budget of a year to work, there has to be some principles followed. Some of them include:
Be Conservative and Optimistic
You cannot predict everything. Not all that you plan for will turn out as expected. Do not underestimate your income or overestimate your expenses.
Teamwork and Consultation
A budget only works when all the parties involved are allowed to give their needs. Do not overwork one person in the company. Split and allocate work among individuals.
Allow Plenty of Time
You will need a lot of time to plan for the year's budget. It's not a few hours job. A lot of things have to be looked into, including planning for emergencies.
Train individuals on strategic and operational plans involving the planning of a budge. Finance is not an amateur's job, especially when the prosperity of a company depends on it.
Get Sign Off
Everybody should agree to the financial budget. Check out with every department to ensure they are all comfortable with the allocation provided for the whole financial year.
The Fiscal Year vs Calendar Year debate is now settled. Before you decide on your tax year, ensure you consider the size of your business. Once you decide, organize a proper budget cycle, either monthly, quarterly, or annually.