What is Financial Year and its advantages

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What is Financial Year

Brief Description:- As a layman, the net profitability of a firm can be measured by comparing the investment in business at the time of commencement of business and at the realization at the time of  liquidation of a firm. But it will be a very very  long period. On the contrary of it, a businessman would like to know the results of the operation of the firm at frequent intervals so that the corrective steps can be taken.  Therefore, the businessman chooses a shorter and convenient period to know the profitability of the firm.

Now a days, it is the practice to adopt a twelve month period to know the financial results.  Financial year is defined as period of twelve months for the purpose of maintenance of the one set of accounts records.  The time-interval of twelve month is called as financial year.  So, the financial year helps to show the financial results on a particular date for a particular period. Basically, the period of financial year is decided by the concerned  government  because so many legal matters are decided on the basis of financial year. The period of financial year remains same for all the business organizations in a particular country.

Though, at any point of time, a business firm may know the financial results of the business transactions but there should be some systematic method for recording the transactions for a particular period. Normally, a set of the accounts records is maintained for a period of one year. After completion of one year, new books of accounts are started and so on. This period of one year is called financial year. A financial year is called as Accounting Year also. According to Indian Income Tax Act it is called as previous year.

In India, financial year starts from 1st April to 31st March. For example, F.Y. 2015-16 i.e.  01.04.2015 to 31.03.2016. It means that all the transactions from 1.4.15 to 31.3.16 will be recorded in F.Y. 2015-16.

Advantage of Financial Year

:- Advantages of a Financial year can be summarized as follows:-

1. If a definite period is determined then it shall be very practical to make the comparison of financial results of two or more periods.

2. So many decisions are made on the basis of financial year only. For example: budgeting, sales tax assessments, income tax assessments and other tax assessments etc.

3. The corrective steps can be taken to minimize the loss or to increase the income of the firm if the results are compared with one period to other period.

Thus, the financial year has got its own importance from the point of view of business firm and the government concerned.

Assessment Year and Financial Year for recent years

PeriodFinancial YearAssessment Year
1 April 2013 to 31 March 20142013-142014-15
1 April 2014 to 31 March 20152014-152015-16
1 April 2015 to 31 March 20162015-162016-17

What is the difference between Assessment Year and Financial Year ?

AY is the assessment year and FY is the financial year. From an income tax perspective, FY is the year in which you earn an income. AY is the year following the financial year in which you have to evaluate the previous year’s income and pay taxes on it.

For example, if your financial year is from 1 April 2015 to 31 March 2016, then it is known as FY2015-16. The assessment year for income earned during this period would begin after the financial year ends–that is on 1 April 2016 till 31 March 2017. Hence, the assessment year would be AY2016-17.

What is assessment year and previous year for income tax?

As mentioned above, assessment year is the year in which income is evaluated and taxed. This evaluation and taxation is done on income that is earned in the previous year, which is known as the financial year.

When does the new financial year start?

Every financial year and assessment year starts on the 1st of April and ends on the 31st of March.