What is a Fiscal Year?

A fiscal year is the twelve-month period over which an entity reports on the activities that appear in its annual financial statements. This period does not have to correspond to the calendar year. For example, a fiscal year might span the period from May 1 to April 30 of the following year. The span chosen usually corresponds to the natural business cycle of an entity.

This period is also commonly used for the annual organization budget. From a financial analysis perspective, one might compare the fiscal year results of a business for several consecutive years, to discern trends.

Reporting of the Fiscal Year

A fiscal year is referred to by the date on which it ends. For example, a company's annual income statement might be described as "for the year ended November 30, 20X1".

Examples of Fiscal Years

A company has a fiscal year that begins on February 1 and ends on January 31. Another firm’s fiscal year begins on April 1 and ends on March 31.

Retail organizations routinely end their fiscal years on January 31, in order to include all residual transactions from their peak Christmas selling season in December.

Advantages of the Fiscal Year

There are several advantages to using a fiscal year, rather than the calendar year. First, it allows a business to close its books during a down period in its business cycle, when there are fewer outstanding transactions. This makes it more cost-effective to close the books. Second, closing at the end of a fiscal year gives the readers of a company’s financial statements a clearer view of a firm’s results over its natural business cycle. And third, setting a fiscal year-end away from the normal busy season of their audit firms can result in lower audit fees, since the auditors may charge lower rates to work during these periods.