Accountants record revenues and expenses on a yearly basis. However, these records may not begin on January 1, like a typical calendar year. Many businesses develop accounting records using fiscal years that begin and end on dates more relevant to their business cycles -- for example, it may make more sense for a university to set its fiscal year to begin July 1 and end June 30. The federal government uses an accounting period that begins on October 1. The fiscal year is divided into quarters and each quarter into three fiscal months. Although a fiscal month can be equivalent to a calendar month, the composition of a fiscal month depends on the method used to develop a fiscal year.
Types of Fiscal Calendars
Although a fiscal year may be 365 days and each quarter three calendar months, making each fiscal month a calendar month, an entity may find another fiscal calendar is superior for its needs. For example, a company may choose a 4-4-5 fiscal year that fixes each quarter at 13 weeks, with the fiscal months consisting of four weeks in the first month, four weeks in the second month, and five weeks in the third month. This cycle repeats itself for the remaining three quarters in the year. This method is especially helpful for businesses that report charges and expenses on a weekly basis, because each week consists of exactly seven days.
One disadvantage of a 4-4-5 fiscal year is that it contains 364 days, which may impede yearly data comparisons, especially in leap years. It also necessitates a 53-week fiscal year once every five years to make up for lost days. However, several computer programs and online applications are available that automatically calculate fiscal months and years. Using the same 13-week fiscal quarter, entities might also arrange their fiscal months in a 5-4-4 or 4-5-4 fiscal year system. For tax purposes, it is important for companies to choose a fiscal month format that they can continuously maintain so the fiscal year records remain consistent. If a company desires to change its reporting format, special permission from the Internal Revenue Service (IRS) is needed.
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