Definition: A natural business year is a company year-end that follows the company’s business cycle instead of the calendar year.
What Does Natural Business Year Mean?
Most companies operate on a calendar year basis. This means that a company opens its books on January 1st and closes its books on December 31st. You might remember from the accounting basics course that at the end of the every year a company makes closing journal entries to close revenue and expense accounts to its retained earnings or capital accounts.
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.
What about seasonal business? All companies don’t have to use a calendar year to open and close their books. They can use a natural business year or a fiscal year. 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.
Take retail stores for example. The end of the year Christmas season is busy for most retailers. 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.