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Understanding Fiscal Years

This guide explains how to manage Fiscal Years in your accounting system—from setting up your financial calendar to closing the books at year-end. Written for everyone, it covers the "why" and "how" of financial periods without the accounting jargon.

What is a Fiscal Year?

A Fiscal Year is the one-year period that your company uses for financial reporting and budgeting.

While many businesses use the standard calendar year (January 1st to December 31st), a "Fiscal Year" can start on any date. For example, a school might run from September 1st to August 31st.

Why does this matter?

  1. Performance Scorecard: It sets the start and finish line for measuring your annual profit or loss.
  2. Tax Compliance: Governments require you to report income based on established years.
  3. Data Safety: "Closing" a year locks your old data so nobody can accidentally change history.

The Lifecycle of a Financial Year

In our system, a Fiscal Year moves through four distinct stages. Think of it like a sports season:

1. 📝 Draft

What it is: Planning mode.

  • You are setting up the dates (e.g., "Year 2026").
  • You haven't started using it yet.
  • You can freely delete or change dates.

2. 🟢 Open

What it is: Game on!

  • This is where you do your daily business: creating invoices, paying bills, and recording journals.
  • The system allows you to post entries within these dates.
  • You can create monthly Periods (Jan, Feb, Mar) to control access even more tightly.

3. ⚠️ Closing

What it is: The referee is blowing the whistle.

  • You have decided to end the year.
  • The system is checking your data for errors (like draft entries that need posting).
  • You are reviewing your final Profit & Loss numbers before locking them in.

4. 🔒 Closed

What it is: The season is over. The trophy is in the cabinet.

  • No changes allowed: You cannot add, edit, or delete any transactions in this year.
  • Why? Once you report your numbers to the tax office or investors, they cannot change.
  • Mistakes? If you find a major error later, you must "Reopen" the year (with strict permission) or make a correction in the current year.

The "Closing" Process: Resetting the Scoreboard

One of the most confusing parts of accounting is "Closing the Year." Let's simplify it.

Imagine a scoreboard at a basketball game.

  • During the game (The Year): Points go up (Income) and fouls go up (Expenses).
  • At the end of the game (Closing): You record the final score.
  • Start of next game (New Year): The scoreboard resets to 0-0.

The Accounting Magic Trick

When you click "Close Fiscal Year," the system performs a magic trick called the Closing Entry:

  1. Zero Out P&L: It takes all your Income accounts and Expense accounts and makes their balance zero. (Resetting the scoreboard).
  2. Calculate Net Result: It takes the difference (Profit or Loss) and moves it to a special account called Retained Earnings.
  3. Keep the Balance Sheet: Accounts like Bank, Inventory, and Debt DO NOT reset. If you have $1,000 in the bank on Dec 31st, you still have $1,000 on Jan 1st.

Example:

  • You made $100,000 in Revenue.
  • You spent $80,000 in Expenses.
  • Net Profit: $20,000.

When you close, the system moves that $20,000 into "Retained Earnings" (Equity) and resets your Revenue and Expenses to $0 for the new year.

How to Manage Fiscal Years

Creating a New Year

  1. Go to Accounting → Configuration → Fiscal Years.
  2. Click New Fiscal Year.
  3. Name: Give it a clear name (e.g., "2026").
  4. Dates: Select Start and End dates (usually Jan 1 - Dec 31).
  5. Generate Periods: Turn this ON to automatically create 12 monthly periods (Jan, Feb, etc.). This helps you lock singular months (like "Close January") without closing the whole year.

Generating Opening Entries

If you have a previous fiscal year in the system, you don't need to manually create opening balances. The system can calculate them for you.

  1. Requirement: The previous year must exist in the system.
  2. Action: Open your new Fiscal Year (e.g., "2026") and click Generate Opening Entry.
  3. Result:
    • The system takes all Assets, Liabilities, and Equity from the previous year.
    • It creates a new "Opening Balance" journal entry on the 1st day of the new year.
    • Income and Expense accounts are excluded (they reset to 0).
    • Review: The entry is created as a Draft, so you can check it before posting.

Closing the Year (The Wizard)

When you are ready to finish a year:

  1. Open the Fiscal Year record.
  2. Click Close Fiscal Year. A wizard will appear:
    • Step 1 (Preview): Verify your Total Income, Expenses, and Net Income. Does it look right?
    • Step 2 (Configuration): Select your Retained Earnings account. This is where the profit goes.
  3. Click Close.

What happens next?

  • A Closing Journal Entry is created automatically.
  • The year status changes to Closed.
  • All periods within that year are marked as Closed.
  • A Lock Date is set, preventing any changes before the end date.

Reopening a Year (Emergency Only)

Did you make a mistake? Did the auditor find something huge?

  1. Open the Closed Fiscal Year.
  2. Click Reopen Fiscal Year.
  3. Confirm the action.

What happens?

  • The Closing Journal Entry is reversed (cancelled out).
  • The year becomes Open again.
  • You can now make corrections.
  • Remember: You must close it again when you are done!

Closing Individual Periods

Sometimes you don't want to wait until year-end to lock your books. You can close individual periods (e.g., January) to prevent changes while the rest of the year stays open.

Why Close Periods?

  1. Monthly Compliance: Many companies need to "lock" each month after their accountant reviews it.
  2. Mistake Prevention: Once January is closed, nobody can accidentally post an invoice dated in January.
  3. Audit Trail: Auditors like to see that old months cannot be modified.

How to Close a Period

  1. Go to Accounting → Fiscal Years.
  2. Open the Fiscal Year you want to manage.
  3. Scroll down to the Fiscal Periods table.
  4. Find the period you want to close (e.g., "January 2024").
  5. Click the Close Period button.

What happens?

  • The period status changes to Closed.
  • The system automatically updates the Lock Date to the period's end date.
  • Any attempt to create or modify transactions before this date will be blocked.

Reopening a Period

Made a mistake? You can reopen a closed period as long as the parent Fiscal Year is still open.

  1. Find the closed period in the table.
  2. Click the Reopen Period button.
  3. The lock date will automatically adjust to the previous closed period's end date.

[!WARNING] If the Fiscal Year itself is closed, you cannot reopen individual periods. You must reopen the entire year first.

Troubleshooting Common Questions

Q: Why does the system say "Validation Failed" when I try to close? A: The system protects you from bad data. Common reasons:

  • Draft Entries: You have journal entries that haven't been posted. You must either Post them or Delete them.
  • Open Periods: If you use monthly periods, you should close them individually first (though the system may allow bulk closing depending on settings).

Q: I closed the year, but my Bank Balance didn't reset to zero! A: That is correct! Asset accounts (Bank, Cash, Inventory) and Liability accounts (Loans, Payables) are never reset. Only "Performance" accounts (Income/Expense) are reset to zero.

Q: Can I have two Open fiscal years at the same time? A: Yes. It is common to have the new year (2027) open for daily work while you are still finalizing and closing the old year (2026).

Q: What is "Retained Earnings"? A: It is an Equity account that represents the total accumulated profit of your company since day one. It tells you how much value the business has kept over its lifetime.