Account Year End: What It Means and How It Impacts Your Business Finances
Understand how your business’s account year end shapes financial reporting, tax obligations, and strategic planning for smoother operations and compliance.
Every business eventually closes its books for the year, a process known as the account year end. This timing influences financial reports, tax filings, and strategic planning. Understanding how your chosen year-end date affects operations helps manage cash flow, meet regulatory requirements, and make informed decisions.
The handling of your account year end has tangible consequences for your business’s financial health.
What Goes Into Determining the End Date
Establishing a consistent time frame for tracking income and expenses, known as a tax year, is fundamental. This annual accounting period typically covers 12 consecutive months. A business formally adopts its tax year upon filing its first income tax return reflecting that period.1Legal Information Institute. 26 U.S. Code § 441 – Period for Computation of Taxable Income
The most common option is the calendar year, running from January 1 to December 31.2Internal Revenue Service. Publication 538, Accounting Periods and Methods Businesses often default to this, and it’s required if formal books aren’t kept or if there’s no established annual accounting period. Sole proprietors generally must use the calendar year if they use it for their personal tax returns.
Alternatively, a business may choose a fiscal year: 12 consecutive months ending on the last day of any month except December. Adopting a fiscal year requires keeping books and records based on that chosen period. A less common variation is the 52-53-week fiscal year, which always ends on the same day of the week and requires specific record-keeping.
Business structure often influences the choice of tax year. C corporations generally have flexibility to choose either a calendar or fiscal year initially, provided they maintain proper records. However, partnerships and S corporations usually face “required tax year” rules, often mandating alignment with the owners’ tax years to prevent income deferral.
Partnerships typically must adopt the tax year used by partners holding a majority interest. If no single year qualifies, the year of all principal partners is used. Absent these conditions, the calendar year is generally the default, unless a business purpose for a different year is approved by the IRS, referencing rules like those in Internal Revenue Code Section 706.3Legal Information Institute. 26 U.S. Code § 706 – Taxable Years of Partner and Partnership S corporations and personal service corporations generally must use a calendar year unless they establish a business purpose for a fiscal year or make certain elections, as outlined in regulations like Internal Revenue Code Section 1378. Demonstrating a business purpose often involves showing the desired fiscal year matches the company’s natural business cycle.
Accounting Methods Affecting End-of-Year Balances
The accounting method used dictates when income and expenses are recorded, directly shaping the financial picture at year end.
Accrual
Under the accrual method, transactions are recorded when they occur, regardless of cash flow. Revenue is recognized when earned, and expenses when incurred. This aligns expenses with the revenues they generate in the same period. Year-end reports under accrual accounting will show balances like Accounts Receivable (money owed by customers) and Accounts Payable (money owed to suppliers). Businesses required to account for inventory generally must use an accrual method for purchases and sales, providing a comprehensive view of financial position.4Internal Revenue Service. Publication 538, Accounting Periods and Methods (PDF)
Cash
The cash method records revenue only when cash is received and expenses only when cash is paid. It’s simpler, directly tracking bank activity. Year-end statements typically lack significant Accounts Receivable or Payable balances. While straightforward, this method might not fully reflect economic activity near year-end if payments are delayed or received early. Many businesses without inventory can use the cash method, but certain entities, like larger C corporations or partnerships with C corporation partners, may be restricted under rules like Internal Revenue Code Section 448.
Hybrid
A hybrid method combines cash and accrual elements. Often, this means using the cash method generally but applying the accrual method for specific items like inventory, as required by the IRS for proper Cost of Goods Sold accounting. A retail business, for example, might use the cash method for daily sales and operating expenses but accrual for inventory costs. Year-end balances reflect this mix.
Common Year-End Reconciliations and Adjustments
Approaching the account year end requires ensuring financial record accuracy through reconciliations and adjustments. These procedures align the books with the actual financial position and performance.
Reconciling bank accounts is essential, comparing the company’s cash ledger to bank statements to account for items like outstanding checks, deposits in transit, bank fees, or interest. Reviewing accounts receivable involves comparing subsidiary ledgers to the general ledger and assessing collectibility, often using an aging report to estimate potential bad debts and adjust an “allowance for doubtful accounts.”
For businesses with inventory, a physical count near year-end is compared to records. Adjustments are made for discrepancies (theft, damage, errors) and to write down inventory if its market value falls below cost. Fixed assets (buildings, equipment) are also reconciled by verifying their existence against the fixed asset register and recording depreciation expense, which allocates the asset’s cost over its useful life.
Other adjustments ensure revenues and expenses are in the correct period. Accrued expenses, like salaries earned but not yet paid or utilities consumed but not billed, are recorded along with corresponding liabilities. Prepaid expenses, such as insurance or rent paid in advance, are initially assets; an adjustment recognizes the portion used up during the period as an expense, reducing the asset balance. These adjustments match expenses to the period they benefit and ensure assets reflect remaining future value.
Tax Filing Obligations Tied to Year End
Your chosen tax year end dictates the deadlines for filing annual income tax returns and paying taxes owed.5Legal Information Institute. 26 U.S. Code § 6072 – Time for Filing Income Tax Returns
Filing deadlines vary by business structure. Sole proprietors report on Schedule C with their personal Form 1040, typically due April 15th for calendar year filers. Partnerships (Form 1065) and S corporations (Form 1120-S) generally must file by the 15th day of the third month after their tax year ends (March 15th for calendar year).6Internal Revenue Service. Publication 509, Tax Calendars This allows partners and shareholders time to receive K-1s for their own returns. C corporations (Form 1120) usually file by the 15th day of the fourth month after year-end (April 15th for calendar year). Deadlines falling on weekends or holidays shift to the next business day.
Businesses needing more time can request an automatic six-month filing extension using Form 7004.7Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax Returns For calendar year partnerships and S corps, this extends the deadline to September 15th; for C corps and sole proprietors (using Form 4868), it’s typically October 15th. An extension provides more time to file, not to pay.
Taxes owed must be paid by the original due date to avoid penalties and interest. The U.S. tax system requires paying taxes throughout the year via estimated tax payments. Corporations expecting to owe $500 or more, and individuals (including sole proprietors, partners, S corp shareholders) expecting $1,000 or more, generally make quarterly payments. For calendar year taxpayers, these are typically due around April 15, June 15, September 15, and January 15. Fiscal year taxpayers follow a similar quarterly schedule based on their year end. Accurate estimated payments ensure compliance and avoid underpayment penalties.
Possible Reasons to Change an Established End Date
Circumstances may arise making a change to the established tax year desirable. Changing an annual accounting period generally requires IRS approval, based on demonstrating a legitimate business purpose, as noted in Internal Revenue Code Section 442.8Legal Information Institute. 26 U.S. Code § 442 – Change of Annual Accounting Period
A common reason is aligning the tax year with the company’s natural business year, which typically ends after a peak season during a low point in the operating cycle. A retailer might prefer a January 31 year-end over December 31 to allow more time for post-holiday inventory counts. IRS procedures recognize this, sometimes allowing automatic approval if tests showing significant receipts in the desired period’s final months are met. This alignment can streamline accounting.
Significant structural or ownership changes can also prompt a tax year change. An entity converting to an S corporation generally must adopt a calendar year unless a business purpose justifies a fiscal year, potentially requiring a change. Shifts in partnership ownership might trigger a mandatory change if the new configuration dictates a different required tax year. Mergers often lead the acquiring entity to conform the acquired company’s tax year for simplified consolidated reporting.
Other factors, like a subsidiary conforming to its parent company’s year-end for administrative ease, might motivate a change request. While convenience alone may not suffice for non-automatic changes under Treasury Regulation 1.442-1, it can be a factor. The IRS provides specific procedures, sometimes allowing automatic approval if conditions are met (e.g., Rev. Proc. 2006-45, Rev. Proc. 2006-46).9Internal Revenue Service. Revenue Procedure 2006-45 (Automatic Approval for Certain Tax Year Changes) Otherwise, Form 1128 is typically filed to request IRS permission, demonstrating a substantial business reason.10Internal Revenue Service. Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year