How to choose an accounting year for your business
Businesses must prepare business accounts for different reasons. These might include:
- To find out how the business has performed;
- To allow it to file for taxes.
And to enable them to do that effectively, business owners must choose an accounting year for their business.
What is an accounting year?
“An accounting year is any period of twelve continuous months for which it prepares its account. It is usually expressed as the year-end date, e.g. 31st December or 31st March.”
Once you choose an accounting year, the business entity must consistently prepare its accounts for that same period. For example, if the accounting year end is 30th June, then the business entity must prepare its accounts every 12 months ending 30th June.
Why is the accounting year important?
The accounting year is important because it affects:
- When the business files for taxes;
- When companies file their annual returns.
- When regulated industries, such as banks and finance companies, file other annual returns, as required by a regulator.
What to consider when choosing an accounting year
In a few industries (e.g. banking and insurance), the accounting year end is fixed by law and every business in that industry must keep to the accounting year, as determined by that law.
If the business entity does not operate in any of those industries with a legally fixed year end, the business is free to choose an accounting year which suits its circumstances.
The factors to consider when choosing an accounting year are:
1. Whether the accounting year for that industry is fixed by law.
If the accounting year for the industry is fixed by law, the business has no choice but to comply.
The accounting year end for these industries are fixed by the laws regulating them:
- The banking industry
- Insurance industry
- National Health Insurance
- Governmental entities, such as a corporation
2. Business season
Some businesses have periods when they are busy, and periods when they are less busy, e.g. a fruit processing plant. Some businesses choose an accounting year that corresponds to the end of the season during which there is less activity and less inventory.
For businesses that carry a lot of inventory, it’s wise to choose a year end that coincides with the end of the season, when presumably they carry less inventory. The cost of counting inventory is lower when the inventory level is low.
3. Uneven distribution of income and expenses throughout the year
If your business is such that the expenses and income occur at different times of the year, it is prudent to choose an accounting year other than the calendar year. This way, it will be easier to match the income to the expenses. For example, a school must choose a fiscal year which is the same as the academic year. This way, all expenses will be easily matched to the incomes realised within that year.
4. A member of a group of companies
If your company is a subsidiary of another company, your company must consider the accounting year end of its parent company. Typically, a subsidiary chooses an accounting year end that corresponds to the parent company’s year-end to facilitate the preparation of group accounts.
5. Availability of auditors
If your business accounts must be audited, then the availability of auditors is an important consideration. As at the time of writing this article, there are less than 500 firms in Ghana authorized to carry out an audit.
If you have the same accounting year end as many other companies, then the availability of auditors can affect:
- The timelines of your audit – the audit firms simply won’t have the resource to audit and have the accounts ready at a time required by the business. The firms will give priority to their bigger clients over the smaller ones. If you’re a small business, you may experience a delay in your audit.
- The cost of your audit – your audit will cost a lot more if your year-end is the same as many other companies. Audit resources are limited, so audit firms will typically charge more when demand is high.
We strongly advise that, if your business is a small or medium enterprise, and is in an industry that is not regulated, you should choose a year end that coincides with dates from June to September. Audit firms, in general, tend to be less busy from June to December.
It is vitally important that you choose your accounting year with care, because it can affect the timing of your tax returns, and the cost of preparing your accounts.