What is a Fiscal Year? - Definition & Example

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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn why companies have different fiscal years and some of the advantages to doing this in this video. Find out how a fiscal year differs from a calendar year and study some current examples.

Overview

What do the Ford, Carter, Reagan, Clinton and Obama administrations have in common? They all had government shutdowns that lasted for a few days to a few weeks. These shutdowns led to massive furloughs and significant disruptions for thousands of workers and millions of citizens. You couldn't watch the news or read an article that didn't refer to terms like the 'fiscal year' and 'budget.' This lesson will focus on what exactly a fiscal year is and explain some interesting points behind it.

Definition

A fiscal year is a 12-month period that a company or government uses for accounting and financial statement purposes. A fiscal year doesn't always begin in January and end in December, like the calendar year. It may run over any period of 12 months. For tax purposes, companies can choose to be calendar-year taxpayers or fiscal-year taxpayers. The IRS automatically assumes that companies prepare their taxes based on the calendar year, so fiscal-year taxpayers have to make some adjustments to the deadlines for filing certain forms and making certain payments.

Why do companies choose a fiscal year that's different than the calendar year? It would seem like it would only complicate things. Actually, it can make things much simpler and more efficient for the company. Not using the actual calendar year gives many companies an advantage, allowing them to close their books at a time which is most convenient for them. For example, Wal-Mart's fiscal year doesn't end right after the holiday season on December 31st because it would be too close to the heavy selling season to prepare its finances properly. The company would be hard-pressed to produce its annual financial statements, count inventories and do many other things associated with the end of a fiscal year because its employees are focused on selling its products and dealing with customers during this period. Because of this, Wal-Mart uses January 31st as the end of its fiscal year. Let's look at some other examples.

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