Accounting Year

An accounting year is a period of reporting of annual financial reports of the company in which the company systematically arranges its financial data. It is useful to keep a track of the transaction during a particular period. Users of the financial statements like the shareholders, banks, financial institutions analyze the performance of the company by analyzing the financial statements. It is therefore important to keep the financial records understandable and prepare them accurately on regular basis. A company prepares every year a balance sheet, profit and loss account and cash flow for the presentation of its financial records. A company has to mention the period when the accounting year begins and ends for the understanding of the users of its financial records. The accounting period varies in different countries but it normally is of 12 months whereas in certain cases it is of 18 months.

Meaning of Accounting Year

An accounting year is the period during which the financial statements of the company are prepared. Generally, accounting periods for external financial statements include the calendar year that extends from January 1 till December 31 and the calendar quarter from January 1 to March 31, April 1 to June 30, July 1 to September 30, October 1 to December 31. Some companies also record their financial transactions on monthly accounting periods. However, the financial statements for the monthly accounting periods are generally used only by the internal management of the company. In an accounting year, the company arranges and organizes its financial activity. The information collected during an accounting period is utilized to prepare both internal and external annual reports which are reported at the close of the accounting period.

Accounting Year in India

Accounting year in India is the period of 12 months starting from April 1 to March 31. It is a commonly accepted period of recording the financial transactions of the business. It is known as accounting year or fiscal year or financial year in our country. This was taken from the British government in 1867 to make even the financial year of India with that of the British Empire. Other British colonies such as Hong Kong and Canada also follow the accounting year from April-March. Earlier to 1867, the fiscal year of India extended from May 1 to April 30.

The accounting year in India is the time period when the government makes up the evaluation of income and expenditure for the country or the state. It is the period for which the government plans out its financial and economic goals and puts down the sources to raise funds for the plans. The Budget or action plan for the coming fiscal year beginning from April is usually presented by the government towards the end of the previous year. 

Taxation is considered to be one of the vital sources of revenue generation for the government. The tax year also runs from April to March. The income earned in one accounting year which is called the previous year is implied to tax in the following accounting year called assessment year. Majority of the companies and other business entities fall in parlance with the fiscal year of the government and tax department, as it maintains uniformity and provides easy comparison of data.

Accounting Year of RBI

The present accounting year of the Reserve Bank of India or RBI is from July to June. Recently, the Central Board of Directors of the RBI suggested to match the accounting year of RBI with the financial year of the government that is from April to March, from 2020-21. The RBI board declared this proposal at its 582nd meeting and approved passing the proposal to the government for receiving its suggestions.

The balance sheet of the RBI plays an important role in the functioning of the economy of the country. It largely shows the activities carried out in the function of issuing currency, monetary policy and reserve management policies.

The RBI acts as the monetary authority, regulator, and supervisor of the financial system, manager of foreign exchange, issuer of currency, regulator and supervisor of payment and settlement systems, banker to the central and the state governments, and also banker to banks for the economy of India.

Reasons for Financial Year in India to begin from 1st April

India, being ruled by the Britishers for more than 150 years, adopted the process of following accounting years from April to March. In the UK, the financial year starts from 1st April and not 1st Jan. The same concept was applied in India as well by the Britishers and after Independence, the Government of India did not change the procedure of following this method. In the many regional calendars like the Hindu calendar, the New Year begins in the month of April and this may be a reason why the government also adopted the process of starting the financial year in the month of April. Also, the crop season in India starts in April and ends in March.

Advantages of Accounting Year

• Benefits in representing the financial position of the company for a particular period.
• Helps in comparison of financial data of two or more-time intervals.
• Helps the company in fixing a period over which books are required to be maintained and closed.
• It is useful for users of financial statements like the investors as they can analyze the patterns of the financial results over several intervals.

Disadvantages of Accounting Year

• It may not work if the concept of matching principle is not followed.
• Comparing the outcomes of one period to another does not reflect the real reasons that led to the differences in outcomes.
• With different tax periods, two separate accounts will be required to be maintained for understanding of the transactions.

Conclusion

In this article, we learned an accounting year is the period during which the financial statements of the company are prepared. A company has to mention the period when the accounting year begins and ends for the understanding of the users of its financial records. The accounting period varies in different countries but it normally is of 12 months whereas in certain cases it is of 18 months. The present accounting year of the Reserve Bank of India or RBI is from July to June. India being ruled by the Britishers for more than 150 years, adopted the process of following accounting years from April to March. In the UK, the financial year starts from 1st April and not 1st Jan. We have also discussed the various types of accounting years namely the fiscal year, calendar year, etc.