Why is there a need to divide the indefinite period of operation of a business entity into calendar year or fiscal year?

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for businesses whose primary operating season doesn’t fall neatly within a single calendar year, choosing a fiscal year end can make more sense.

The ins and outs

A calendar year, as you would expect, covers 12 consecutive months, beginning January 1 and ending December 31. Under tax law changes generally going into effect with returns due in 2017, flow-through businesses (such as partnerships, limited liability companies and S corporations) using a calendar year must file their tax returns by March 15. (The deadline for calendar-year C corporations is generally moving to April 15 starting with the 2016 tax year.)

A fiscal year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30 of the following year. A fiscal year also can include periods of 52 to 53 weeks. These might not end on the last day of a month, but instead might end on the same day each year, such as the last Friday in March.

Under the new law, flow-through entities using a fiscal year now file their return by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they would need to file their return by June 15. (Fiscal-year C corporations now generally must file their return by the 15th day of the fourth month following the fiscal year close.) Companies that adopt a fiscal year also must use the same time period in maintaining their books and reporting income and expenses.

Determining which tax year is best 

A business owner chooses the company’s tax year when filing its first tax return. Simply paying estimated taxes, filing for an extension or submitting an application for an employer identification number won’t count as having adopted a tax year. Although just about any business can choose to use a calendar year as its tax year, the IRS requires some businesses to do so. Businesses that don’t keep books and have no annual accounting period must use a calendar year. Most sole proprietorships also are required to use a calendar year. To the IRS, sole proprietorships lack distinct identities apart from their proprietors, who as individuals typically use a calendar year when filing their returns.

Individuals who file their first tax return using a calendar year and later become sole proprietors, partners in a partnership or shareholders in an S corporation generally must continue to use a calendar year, unless they receive approval from the IRS to change it. Gaining such approval might be necessary if, for instance, the majority of partners use a fiscal year.

When a fiscal year makes sense 

While a calendar year end is simple and more common, a fiscal year can present a more accurate picture of a company’s performance. This often is the case with seasonal businesses. For example, many snowplowing companies make the bulk of their revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of the company’s performance over a single season difficult.

In addition, if many businesses within an industry use a fiscal year end, a company that wants to compare its performance to its peers probably will achieve a more accurate comparison if it’s also using the same fiscal year.

It can make a difference 

Companies that change their legal structure or operations may find it makes sense to also change their tax year. They’ll need to obtain permission from the IRS and submit Form 1128, “Application to Adopt, Change or Retain a Tax Year.”

Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. Your accounting professional can help you determine whether a calendar or fiscal year makes more sense for your business.

4 Min. Read

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2. Accounting
3. What Is an Accounting Period?

March 28, 2019

An accounting period is the time frame for which a business prepares its financial statements and reports its financial performance and position to external stakeholders. This could be after three, six or twelve months.

The accounting period usually coincides with the business’ fiscal year. However, there are many business entities that follow the accounting period of three months or six months.

Internally, the accounting period is considered to be a month or a quarter while externally it is for a period of twelve months. The International Financial Reporting Standards (IFRS) allows a 52-week period (also known as the fiscal year), instead of a full year, as the accounting period.

What this article covers

• What Is the Accounting Period Cycle Concept?
• What Are the Types of Accounting Period?
• Why Is an Accounting Period Important?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Is the Accounting Period Cycle Concept?

During the accounting period, a company gathers and organizes its financial activity. This is used to create financial statements at the close of the accounting period.

The accounting period can be considered as the time taken to complete an accounting cycle of the business. Since the accounting cycle records transactions over a period of time and reports them in the form of financials, one accounting cycle equals one accounting period.

The cycle begins the financial books at the beginning of each period with reversing entries and closes the books at the end of a period with year-end closing entries. To complete this cycle, businesses must prepare the financial statements before the start of the next accounting period.

What Are the Types of Accounting Period?

The Calendar Year

Usually, the accounting period follows the Gregorian calendar year that consists of twelve months starting from January 1 to December 31. The accounting period follows this natural sequence of months.

Fiscal Year

The fiscal year refers to an annual period that does not end on December 31. The International Financial Reporting Standards (IFRS) allows 52 weeks as an accounting period. There are many companies that follow the 52 or 53 weeks fiscal calendar for their financial tracking and reporting.

The Internal Revenue Service (IRS) allows taxpayers to either use the calendar-year taxpayers or fiscal-year for tax reporting.

For example, a business may choose a fiscal year from Feb. 1 to Jan. 31 or observe a 52-53-week fiscal year, where each year rotates between being 52 or 53 weeks long. If a business wants to select the fiscal year for tax reporting, they can do so by submitting their first income tax return observing that tax year.

In case a business wants to change from a calendar year to a fiscal year, they would need special permission from the IRS.

4–4­–5 Calendar Year

This is the common calendar structure for some retail and manufacturing industries. In the 4–4–5 calendar a year is divided into 4 quarters. Each quarter has thirteen weeks which are grouped into one 5-week month and two 4-week months.

The benefit of using this calendar over a regular calendar is that the end date of the period is always the same day of the week. Each accounting period corresponds to the same accounting period in the previous year and the next year. provides a review and forecast tool for management and helps in comparative analysis.

Why Is an Accounting Period Important?

Accounting period provides business owners the perspective about the profitability of the business on an ongoing basis and helps them make informed business decisions. To enable this, the accountants have developed the periodicity concept.

Using this concept, the business’ ongoing and complex undertakings are divided into short time periods and reported in monthly, quarterly and annual financial statements. For each time period, the business prepares and publishes financial statements. The time period of the financial statement is shown in its heading.

This information is significant for business owners, investors, creditors and government agencies. The time period assumption provides the stakeholders with the reliable and relevant financial information to make reliable business decisions in a timely manner.

The choice of accounting period depends on the business needs and circumstances which might be complex enough to warrant different accounting periods. All businesses are allowed to define as many periods as they want as long as they meet legal requirements.

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