Definition
Financial Year
1. Any year connected with finance, such as a company’s accounting period or a year for which budgets are made up.
2. In the UK, a specific period relating to corporation tax, i.e., the 12 months beginning on April 1 in one year and ending on March 31 in the next year. Corporation tax rates are set for specific financial years by the Chancellor in the Budget; if a company’s accounting period crosses two financial years, the profits must be apportioned to the relevant financial years to determine the applicable tax rates. Compare: [fiscal year]
Examples
- Corporate Financial Reporting: A company in the UK planning its annual report for the year ending March 31, 2022, will base its financial year from April 1, 2021, to March 31, 2022.
- Tax Calculation: A corporation with an accounting period of January 1, 2021, to December 31, 2021, will need to apportion its profits between two financial years for corporation tax purposes: April 1, 2020, to March 31, 2021, and April 1, 2021, to March 31, 2022.
Frequently Asked Questions (FAQs)
What is a financial year?
A financial year is a specific 12-month period used for accounting purposes and financial reporting. It does not always align with the calendar year.
How does a financial year differ from a fiscal year?
While the terms are often used interchangeably, a fiscal year typically refers to a 12-month period set by each country or organization for accounting and tax purposes. For example, in the U.S., the fiscal year runs from October 1 to September 30.
Why is the financial year important?
The financial year is crucial for organizing financial statements, budgeting, and determining taxable income and applicable tax rates.
How is a financial year determined?
In the UK, the financial year for tax purposes runs from April 1 to March 31. However, companies can set their own accounting periods, provided they comply with legal requirements and apportion profits across financial years if needed.
What happens if a company’s accounting period spans two financial years?
The company must apportion its profits between the two financial years to determine the correct tax rates applicable for each period.
Related Terms
- Accounting Period: The span of time covered by financial statements, typically one year.
- Corporation Tax: A tax imposed on the net income (profit) of a corporation.
- Fiscal Year: Any yearly period used for accounting purposes; for example, the United States government’s fiscal year starts on October 1 and ends on September 30.
- Budget: A financial plan for a defined period, often one year, that includes planned revenues and expenditures.
Online References
Suggested Books for Further Studies
- “Intermediate Financial Accounting” by Glenn Arnold
- “Financial Accounting” by Robert Libby, Patricia Libby, and Daniel Short
- “Taxation of Corporations and Shareholders” by Boris I. Bittker, James S. Eustice
Accounting Basics: “Financial Year” Fundamentals Quiz
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