What is Financial Year?
Financial Year (FY) is annual period for calculating the taxes, Budgets, and reporting. It is also known as Fiscal Year, which the government uses it for accounting and budgeting process. It is a way to analyse the performance of the business over a period and helps the business owners to make the important decisions.
Impact of Financial Year on Taxes:
1. Financial year helps to track the performance of the business and helps in calculating the taxes. It also helps to analyse the trends and make the investment decisions for the business.
2. Taxes are due at end of each financial year, so the business must be aware of the financial year periods for making any changes accordingly.
3. Example: if the business has a huge profit during the year, they may reduce the tax before the financial year end by purchasing any new equipment or upgrading the existing one. If the business has a loss during the financial year, they may take the actions accordingly.
Importance of Financial Year:
1. Financial year calculations help us to know the financial position of the business. The data we collect for the purpose of FY is useless if no analysing is done.
2. We need to analyse the data to know the financial performance of the business.
3. Operational efficiency of the business can be concluded with the help of ratio analysis and other techniques which in other words is financial analysis.
4. We will be preparing the comparative statements of Profit and loss and balance sheet which indicates the financial position of the business (profit /loss by the company) during the year.
5. It also helps us in indicating or finding out the problems and inefficiencies.
6. It helps us in the intra firm comparison among the different departments of the same entity and helps in the development of the lacking departments.
Limitations of Financial Year:
1. Financial analysis will not take the fact of price level changes as it is based on the historical concept.
2. It does not consider the Qualitative aspects like quality of the employees and the management as it keeps only track of the quantities.
3. Financial Year provides a biased statements as it depends on the aspects and judgements of the accountant.
Tips for the Financial Year:
1. Organising the files:
• For filing the taxes, we need invoice copies, receipts, and other reports. Have an easily accessible folders and files to store the data’s needed for the FY.
• Keep a track on the information’s needed in a software or an app, this will help us in the future to face the Financial Year.
2. Plan the Future:
• Analyse the things which didn’t go as per the plan and how you overcame it. Change the plan for the if we are not able to attain the perspective of targets and goals.
• Do research on the upcoming events and plan the slow and busy periods of the business. Consider the options of developing the productivity and the increasing the incomes of the business.
Vital Financial Reports:
1. Cashflow Statement:
Cashflow statement helps the business to know where the income comes from and how the money is spent.
It helps the business in checking the liquidity to fund its day-to-day operating expenses. They can use the statement to consider the important decisions of making investments.
The important components of CFS are Operating activities, Investment activities and financial activities.
2. Profit and loss statement:
The income received and expenses incurred for a given period of time can be ascertained in the Profit and Loss statement.
The Profit and Loss statement can be better understood by subdividing it into three categories as mentioned below:
• Revenue earned – The total income earned by the business during its course of time.
• Costs incurred – The total expenses incurred by the business for its operation such as research expenses, taxes, interest etc.
• Net Income – Net Income is the amount that is left after deducting the total costs incurred from the total income earned by the business.
Apart from summarizing the revenue and expenses, this statement also helps to ascertain the profit ratio and operating ratio of the firm.
Every business has its own assets and liabilities. It is important to keep a track of what we own and what we owe others as it helps us to know the financial position of the firm. In order to serve this purpose, we prepare the Balance Sheet.
The assets of the firm may be classified as follows.
• Current assets such as cash in hand, cash at bank, closing stock, debtors etc.
• Fixed Assets which includes land, Building, furniture etc.
• Current Liabilities such as Trade payables, Bank overdraft and Outstanding expenses.
“Balance Sheet” as the name suggests, the assets that the firm owns should balance out with what the firm had borrowed. In short, assets should equal to the liabilities of the firm.
BK & OSS Team