Getting to grips with accounting terminology can be tricky but essential if you run your own business. You’ve likely come across the phrase financial year at some point, especially when it’s tax return time. We’ll explain what it means, and why it’s an important basis for your business’s accounts.
What is a financial year?
The financial year of a company is the range of time covered by its financial statements, which report on its financial performance. It’s known as an Accounting Reference Period and is usually 12 months long, though it may be longer or shorter for companies, and can be changed later on.
When does a company’s financial year start and end?
A company’s financial year runs from the date which the company was incorporated, until the end of the same month the following year- what’s known as the accounting reference date.
Example financial year in a company’s first year
A company is incorporated on 17th March 2020. The financial year begins 17th March 2020, and finishes 31st March 2021.
This means that the accounting reference date in this instance is 31st
In year two of the business, the financial year begins 1st April 2021, and finishes 31st March 2022.
Why does my company need a financial year end?
The accounts for each year are made up to the end of the financial year, and then filed with Companies House. The financial year end also indicates what date you should submit a Corporation Tax return and pay the bill.
The financial year end isn’t all about HMRC, though. Accounts should be balanced and resolved on a regular basis throughout the year, with year-end being the final check that everything across the year balances as it should.
It’s worth noting that it is also another way of monitoring financial performance, comparing it to previous years to see if there are areas where further attention might be needed.
And of course, we’d like to point out that using accounting software with reporting functions, such as those in our own Pandle bookkeeping software, will help you monitor the financial position of your business throughout the year, too!
Can I change my accounting reference date?
You’re allowed to change your company’s financial year end to a more convenient date, as long as your accounts are not overdue. Use form AA01 to change the date with Companies House.
Changing the financial year end also affects Corporation Tax due dates so it may be worth checking that the new dates don’t create other problems, such as cash flow issues from juggling paying your bill!
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