A financial year, also known as a fiscal year or accounting year, is a 12-month period that businesses use for financial reporting and accounting purposes.
What is a financial year?
A financial year serves as the basis for preparing financial statements and evaluating the financial performance of an organisation. It typically spans 12 months, but the start and end dates can vary. The financial year may align with the calendar year (January 1 to December 31), but organisations often adopt alternative fiscal years based on operational or regulatory considerations.
The primary purpose of having a financial year is to provide a standardised timeframe for financial reporting and performance assessment. It allows businesses to organise and analyse financial data, track revenues and expenses, and prepare financial statements such as the income statement, balance sheet, and cash flow statement.
The financial year is divided into accounting periods, usually months or quarters, to simplify regular financial reporting and analysis. Quarterly reports are common, and they provide stakeholders with timely updates on the organisation’s financial health.
The financial year is integral to the budgeting and planning process. Businesses set financial goals, allocate resources, and plan expenditures based on their fiscal year. Budgets help guide financial decisions and measure actual performance against anticipated outcomes.
Example of financial year
Let’s assume a company’s financial year runs from January 1 to December 31.
January 1, 2023, to December 31, 2023:
During this period, the company conducts its business operations, generates revenue, incurs expenses, and engages in various financial activities. The company’s financial statements, such as the income statement, balance sheet, and cash flow statement, are prepared at the end of this financial year.
For instance, if we consider the income statement for this financial year:
This represents a summary of the company’s financial performance over the entire financial year. The company earned £500,000 in revenue, incurred £350,000 in expenses, resulting in a net income of £150,000 for the period from January 1, 2023, to December 31, 2023.