Although rarely a topic of daily conversation, the fiscal year has an important role in the world of taxation and finance.
This period helps governments and companies set a time frame for the preparation of financial statements, tax payments, as well as more structured budget planning.
To understand more about the definition, function, and relevance of the fiscal year in the world of accounting and Finance, let's explore the discussion in this article!
What is a fiscal year?
A fiscal year is a one-year period that a company uses to evaluate and report on financial performance and Budget Management.
The financial statements help assess whether the finances have been managed properly.
Through this evaluation period, the company can determine policies and design business strategies more precisely.
Difference between fiscal year and calendar year
The main difference between a fiscal year and a calendar year lies in the flexibility of determining the beginning and end of the time period.
Fiscal year it is not mandatory to start on January 1st like a calendar year, although both still cover the full 12-month period.
For example, the year can run from July 1 to June 30 or April 1 to March 31, depending on the needs and policies of the company or organization.
Fiscal Year Requirements
Requirements fiscal year depending on the rules in force in the country where the company operates.
In Indonesia, the regulation is regulated by the Directorate General of taxes under the auspices of the Ministry of Finance of the Republic of Indonesia.
In general, the fiscal year follows the calendar year (January 1–December 31), but the company can choose a different period by fulfilling certain conditions.
Companies that want to use years outside the calendar year can apply for changes to the Directorate General of taxes with some requirements to be completed.
It should be noted that although companies in Indonesia can apply for changes, the process of changing the fiscal year is not easy to do because it requires a strong business justification.
Companies must provide a clear reason why they want to use a different fiscal period than the calendar year.
Fiscal Year Objectives
In general, the objective of the fiscal year is to increase the sustainability and growth of the company through the following processes.
1. Provide accuracy in financial calculations
The fiscal year allows the company to prepare accurate financial statements. When this period ends, the company may:
- Sort out Assets, Liabilities, and equity systematically.
- Make decisions regarding the quantity of dividends that can be given to shareholders.
- Setting up funds for reinvestment aimed at supporting business growth.
- Measure employee achievement against goals set at the beginning of the year.
2. Outlining The Company's Revenue Cycle
A revenue cycle is a pattern or season that shows when a company generates its highest and lowest revenue. This information is important because:
- Helps companies identify peak sales periods to maximize profits.
- Provide insight into low periods to plan efficiency or cost savings strategies.
For example, fitness center companies often get the highest revenue early in the year, while businesses like home improvement stores experience a surge after the rainy season.
3. Prepare The Annual Budget Effectively
The year-end evaluation helps the company draw up a budget for the following year. This process includes:
- Identify the budget needs of each department.
- Evaluate whether the available budget is sufficient to support the success of the project.
- Decide on increased budget allocation in sectors that have the potential to increase efficiency.
For example, companies may consider allocating more budget to improve technology to support employee productivity.
4. Maximizing employee promotion and reward opportunities
The end of the fiscal year is the momentum to evaluate the performance of individuals within the company. If the annual target is reached, the company can:
- Consider promotions for employees who show outstanding performance.
- Set up a salary increase as a form of reward.
Thus, employees have more motivation to contribute to the achievement of company goals.
Fiscal Year Example
Each company is free to determine when fiscal year they begin and end, during which the fixed period includes 12 months. Interestingly, this fiscal year does not always have to be in line with the calendar year.
The difference in business cycles allows companies to define fiscal years as different from calendar years.
An example of a fiscal year is Microsoft which starts its period on July 1 and ends it on June 30 of the following year. Meta that follows the calendar year, which is from January 1 to December 31.
Another example of a fiscal year arrangement is as follows:
- September 1 to August 31
- March 1 to February 28
- April 1 to March 31
How To Determine The Fiscal Year
Determine fiscal year the right one can affect the financial reporting of your business. To make the process simpler, the steps for determining the fiscal year are as follows:
- Adapt to the type of business: If your business is an individual business, your fiscal year automatically follows the calendar year (January 1 – December 31). However, if your business is seasonal, choose an appropriate fiscal year end date.
- Consider The Time Of Greatest Income: Determine when your business earns the most revenue. If the peak in revenue occurs in the middle of the year, as in crowded businesses in a particular season, choose June 30 as the end fiscal year.
- Check company policies and consult with experts: Keep changes fiscal year in accordance with the Articles of Association (ART) of the company. Do not hesitate to consult with legal advisors and tax experts so that the process runs smoothly and in accordance with applicable regulations.
Conclusion
The meaning of a fiscal year is a 12-month period that a company uses to evaluate financial performance and compile accurate reports.
Determination of the fiscal year is possible as a form of adjustment to business needs.
By setting the right fiscal year, companies can manage budgets, plan strategies, and maximize growth potential more effectively.
Audit Software such as Audithink's Comprehensive Features help automate the process financial audit at the end of the fiscal year, ensure that all transactions and reports have been processed accurately and in accordance with the rules.
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