Fiscal Years are used to separate the accounting years from each other. A country's legal authority have various rules about how these Fiscal Years should be setup. A Fiscal Year often follow a normal Calendar Year, Jan 01 - Dec 31. But it could also be a broken year, f.i. Jul 01 - Jun 30. Many countries allow you to have an initial prolonged year, f.i. Jul 01 2009 - Dec 31 2010.
When you start a new Company, you should check that the Fiscal Year is setup correctly. If this is not your starting Fiscal Year, then you should start by creating the starting Fiscal Year. After you have corrected the starting Fiscal Year, you can delete other Fiscal Years if there are no transactions in them. Now set this new Fiscal Year on your company by selecting Setup tab, Company Setup.
If the first year is setup as Jan 01 2011 - Dec 31 2011 and your starting Fiscal Year should be Jul 01 2011 - Jun 30 2012:
- Create a short dummy year, Jan 01 2012 - Jun 30 2012
- Create another Year Jul 01 2012 - Jun 30 2013
- Set the company to use this year
- Close and delete the year Jan 01 2011 - Dec 31 2011
- Close and delete the short dummy year Jan 01 2012 - Jun 30 2012
- Create the correct broken Fiscal Year Jul 01 2011 - Jun 30 2012
- Set this Fiscal Year Jul 01 2011 - Jun 30 2012 as active for the company
You are now ready to make your transactions. You have 2 fiscal years and you are using the current (Jul 01 2011 - Jun 30 2012) one, whilst the later one (Jul 01 2012 - Jun 30 2013) is not current.
When you reach the end of your Fiscal Year, you have to create another new Fiscal Year. When you want to switch Fiscal Year on your company, go into company setup and do that. When you have finished your year-end entries, you may close the Fiscal Year.
A closed Fiscal Year can no longer be used for entries. When a Fiscal Year is closed, the difference between all asset and liability accounts are brought forward as a Journal Entry where the Default account for Retained Earnings is credited (if this is a profit, otherwise it is debited). And the default account Profit/Loss Year is debited (if this is a profit, otherwise it is credited).
You can have as many Fiscal Years running as you want, but for performance reasons you should not have more than needed (by your legislations). When you delete a Fiscal Year, the assets, liabilities and equities are brought forward. All other unneeded transactions such as documents are deleted.
Tips and Tricks
In a newly setup company, we can change the fiscal year in the table X_fiscal_year where X is the company index number in the array $db_connections in the config_db.php. This can be done using any MySQL client like phpMyAdmin, SQLyog, etc.,.