What is a natural business year?
All companies don’t have to use a calendar year to open and close their books. This type of odd year end coincides with the business’ sales flow rather than the calendar. This makes sense because businesses wouldn’t want to close their books right in the middle of a business season just because it falls on the end of the year. These lower balances make it easier to audit the period-end accounting records of a business, and verify that its ending balance sheet figures are accurate. The reduced amount of audit work means that audit fees can be reduced.
My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Many companies have a natural business year of January 1 through December 31. On the other hand, some companies are required by government regulations to end their accounting years on December 31, even though it is not the end of their natural business year. Discover the principles of basic accounting and learn essential accounting terminology.
An accounting and financial reporting year ending on a date other than December 31 is referred to as a fiscal year. The natural business year is defined as a period of twelve consecutive months in which accounting of business operations performed an entity is done…. This means that a company opens its books on January 1st and closes its books on December 31st.
January and after Christmas is also a busy part of their fiscal year. It wouldn’t make sense for them to close their books on December 31 and cut their busy season in half. Instead, most retailers chose to have natural business year ends ending on January 31. This way the entire busy season is captured in a single year’s financial statements.
Use of the Calendar Year as the Natural Business Year
Explore examples of these accounting terms in real-life situations. When there is no discernible natural business year, many businesses tend to adopt the calendar year as their official fiscal year. Except where mandated by the government, a company can select any fiscal year it wants. The use of the natural business year as the fiscal year is recommended, but a company can certainly use other dates.
The natural business year for a school year is July 1 through June 30. The reason is that school year classes are usually finished in June.
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A natural business year is a period of 12 consecutive months, terminating in a natural low point in the sales activity of a business. More specifically, there should be a decline in the accounts receivable, accounts payable, and inventory that a business states in its accounting records. At this point, more receivables than usual have been converted into cash, and inventory balances have been drawn down.
- Except where mandated by the government, a company can select any fiscal year it wants.
- The reason is that school year classes are usually finished in June.
- Instead, most retailers chose to have natural business year ends ending on January 31.
- Explore examples of these accounting terms in real-life situations.
In addition, with the sales level so low, it is much easier for the accounting staff to close the books at the end of the natural business year. That way the beginning of the next year it can start fresh with zero balances in all its income statement accounts. Closing the books on an annual calendar year basis works well for companies that aren’t seasonal and don’t have large variations in sales throughout the year. The one-year period ending at an organization’s typical low point of activity. For example, a school’s natural business year is July 1 through June 30. It is practical to have the accounting and financial reporting year match the natural business year.