Some companies use the regular calendar year of Jan. 1 through Dec. 31 for accounting and budgeting purposes. Others, however, use an alternate 12-month period to track and record their finances. This is known as a fiscal year.
Fiscal year versus calendar year
A fiscal year is an accounting year that, unlike the calendar year, doesn't necessarily end on Dec. 31. A fiscal year is essentially a customized 12-month period used for accounting purposes. For example, a company might operate on a fiscal year that begins on Nov. 1 and ends on Oct. 31. Companies that follow a fiscal year must still adhere to IRS tax filing deadlines, which are based on the calendar year.
Just as certain companies operate on a fiscal year instead of the calendar year, so too does the U.S. government. The federal government's fiscal year begins on Oct. 1 and ends on Sept. 30.
Benefits of operating on a fiscal year
Some companies opt to follow a fiscal year instead of a calendar year because their fiscal year better fits their natural business cycles. School districts, for instance, like to follow fiscal years of July 1 through June 30, because that time frame aligns most closely with the school year and the related financial milestones. Retailers, by contrast, tend to end their fiscal years on Jan. 31. The reason is that December tends to be an extremely busy month for retailers because of the holidays. As such, many see a tremendous influx of revenue in December, much of which then needs to be adjusted come January, when consumers have a tendency to return unwanted gifts. Ending their fiscal years in January gives retailers a more accurate financial picture to report.
Seasonal businesses also tend to use fiscal years for accounting purposes. For example, if a company brings in most of its revenue during the spring and incurs most of its expenses during the winter, then a fiscal year ending in July or August might make more sense than one ending in December.
Another benefit of following a fiscal year is the potential to save money on accounting and auditing fees. Because many companies and entities follow the calendar year for accounting and auditing purposes, tax and accounting professionals may be in high demand in the months leading up to Dec. 31. Companies that require audited financial statements therefore stand to benefit by operating under fiscal years that don't end on Dec. 31, as doing so gives them increased access to accounting professionals and the ability to negotiate fees.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.