A business’s financial statements and reports are prepared during an accounting period. It signifies the beginning and end of an accounting period. Accounting periods can be as brief as a week or a month, however, they usually last a year. As a result, they may overlap.
In this article, we examine what the closing month of the accounting year is and the many types of accounting periods used by businesses.
What Is Closing Month Of Accounting Year?
The closing month of the accounting year can be referred to as the last month of the accounting year or tax year. However, an accounting or tax year is usually 12 months long. It can be based on a calendar year or a fiscal year. A calendar year comprises 12 months, that end on December 31.
In bookkeeping, an accounting period is the time period within which management accounts and financial statements are created. The accounting period in management accounting varies greatly and is chosen by management.
Accounting periods of one month are typical. The accounting period in financial accounting is normally 12 months and is defined by regulation. The start of the accounting period varies depending on the jurisdiction. For example, one entity may use the calendar year (January to December), while another may use the accounting period (April to March).
Read Also: STALE DATED CHECKS: How It can Affect Your Business
What Is The Best Date For The Closing Month Of Accounting?
Businesses usually consider two criteria for setting a fiscal year-end:
- Type of business: To match the personal tax year-end, a sole proprietorship or a business that is taxed as a sole proprietorship (single-member LLC, for example) must utilize a December 31 fiscal year-end.
- Business cycle: If your business is not taxed as a sole proprietorship, you can select the end of any quarter for your fiscal year-end. Most companies base their fiscal year-end on the business cycle for their industry, choosing the end of the busiest time for their fiscal year-end.
Some instances include: Companies that conduct the majority of their business during the summer may opt for a September 30 year-end. If your company does a lot of business with the federal government, you might want to adopt a September 30 year-end to correspond with their fiscal year-end. You might choose December 31 if your business performs most of its selling during the holidays.
Related Post: ACCRUED INCOME: Definition And All You Need To Know
Why Does A Small Business Use A Fiscal Year?
Here are a few things that Small businesses usually think about during the fiscal year for two reasons:
- They want to do their accounting and generate their first set of financial statements (e.g. because they’re in the process of applying for a loan).
- They’re filing their first business tax return and have the option of becoming a fiscal year taxpayer.
Businesses that have evident peak and low periods during the year may choose to use a fiscal year rather than the traditional calendar year. This is particularly true if:
- It better captures what’s going on with their business and makes it look better on paper
- It makes financial planning easier
- The business has a lot of inventory
Adopting a fiscal year is a complicated decision that should almost certainly be left to your accountant.
Fiscal Year vs Calendar Year: Which One Is Better For My Business?
If a company’s fiscal year ends on the same day as the calendar year, the fiscal year concludes on December 31. Companies, on the other hand, have the option of selecting the best fiscal year-end for them, one that is tailored to their specific needs.
Companies that operate on a non-calendar business cycle or have non-calendar suppliers may choose a fiscal year-end date that better fits their company operations.
Due to the intense sales cycle during the holiday season, many retail enterprises have a fiscal year that differs from the calendar year. Because December 31 falls during the peak shopping season, a retailer may find it difficult to produce annual financial statements and inventory counts at the same time as labor and resources are devoted to the sales floor.
In this situation, the company may choose a different fiscal year-end date, such as January 31 instead of December 31. For example, a luxury resort’s optimum time to report earnings is likely after the vacation season, thus it may choose a fiscal year-end of September 30.
Accoridng to Investopedia, whatever fiscal year-end date is determined, organizations must make a decision when they file for incorporation, as their fiscal year-end date cannot be changed every year. It is also important to note that the timing of a company’s fiscal year does not change the due date on taxes.
REA ALSO: OPERATING CYCLE: Definition, Formula, Calculations & Examples
Why Do Businesses Need A Closing Month of Accounting?
Here are a few reasons why your business needs a closing month of the accounting year:
1. For Management Purposes
If your company has a lot of inventory, choosing a fiscal year is especially critical. Your fiscal year should end when inventory is at its lowest point of the year, so there’s less to count, and slow-moving inventory is easiest to spot. When business is slow, it’s also easier to catch up on things like accounts receivable, returns, and overdue amounts.
The end of your fiscal year should ideally fall during the time of year when you have the freest time. This allows you to stand back from the business and perform long-term planning, sign new contracts, set budgets, and so on.
December 31st might happen to be that day for your business, but for many businesses it isn’t.
2. For Accounting Purposes
Accounting is a seasonal business because many organizations employ the usual December 31st year-end. Choosing a fiscal year-end other than December 31st can help spread out the work and make life easier for your accountant, as well as save you money.
Recommended: FORM 911: How to Request a Taxpayer Advocate Form
3. For Creditors and Investors
Choosing a fiscal year that corresponds to your natural business year can help improve the appearance of your financial statements for investors and creditors.
The conclusion of your natural business year is typically when you’ve converted the majority of your inventory to cash and your current ratio is at its highest (i.e., when you’re most liquid and capable of repaying your debts).
Choosing a fiscal year might help you compare your performance to that of other companies in your field, especially if they don’t use the regular calendar year.
What Is The Closing Month Of Accounting Year For Estate?
Ideally, the estate calendar year starts on the day of the estate owner’s death and ends on Dec. 31 of the same year. The executor, however, can file an election to choose a fiscal year, which implies the tax year ends on the last day of the month before the one-year anniversary of death.
Can I Change The Closing Month Of An Accounting Year?
Unless you are a Liberal professional, the law does not specify a year-end date for accounting years. In all other circumstances (individual company, firm, EURL, etc. ), the closing date and activity report can be customized when the company is founded.
The end date of the accounting year is completely up to you; you can shut the year at any time. A 12-month accounting year is required.
Because it coincides with the conclusion of the calendar year, the date of December 31 may be utilized as the year-end date. For the sake of simplicity, a date that ends a calendar quarter (March 31, June 30, September 30) is frequently chosen.
The decision on the closing date may be influenced by the company’s business activity. A seasonal business, for example, can set a closing date for the end of the season. This date will enable him to submit accounts with low stock levels or a healthy cash balance.
Many accounting and tax duties coincide with the end of the year. These include keeping an annual inventory, opening social accounts within six months of shutting, and keeping tax books…
In exceptional cases, the duration may be less than or more than 12 months in the following cases:
- First or last accounting year of the company
- Change in the closing date of the accounting year
Other Factors To Consider In Closing Month Of Accounting Year
- The earlier you choose your accounting year-end in the tax year, the longer you will have to pay tax on your profits.
- Although having an earlier year-end has a cash flow benefit, which accounts for higher liability when the business closes.
- The simplest way to apply the current year basis of assessment is to use an accounting year-end of 5 April or 31 March.
FAQs On Closing Month Of Accounting Year
After a fiscal year is closed, you must close the income statement accounts and transfer the year’s results to an account in the balance sheet.
Year-end – also known as an accounting reference date – is the completion of an accounting period. At this time, businesses need to carry out specific procedures to close their books.
Fiscal year-end simply refers to the completion of a one-year, or 12-month, accounting period
The closing month of the accounting year can be referred to as the last month of the accounting year or tax year.
The estate calendar year begins on the day the estate owner dies and ends on December 31 of the same year. The executor can elect a fiscal year, so the tax year ends on the last day of the month preceding the one-year anniversary of death.
Conclusion
A calendar year or fiscal year is normally 12 months long in accounting or taxation (including 52 or 53 weeks). A fiscal year consists of 12 consecutive months or a 52-53 week year that concludes on the last day of any month other than December, whereas a calendar year consists of 12 months that end on December 31st.
References
- investopedia.com – Fiscal Year-End
- makedailyprofit.com – Closing Month of Accounting Year: Definition and How To Choose For Your Business
- thebalancesmb.com – How to Determine Your Company’s Fiscal Year
We Also Recommend
