The method you outline is actually the correct 'out of the box 'way to have a sequence matching the fiscal year.

A module that supports FISCAL YEAR as a prefix placeholder is at http://v6apps.openerp.com/addon/6205

OK i have found a solution my self for this maybe its a temp solution

so i go to

Accounting> configuration>Journals> select the journal i want to change the numbering for and select edit

under entry sequence i choose the small box with the arrow on the side

go to fiscal year select add then select the fiscal year you want 2012 for ex and in the sequence field select create here change the prefix delete it and just add 2012

same goes for all the fiscal years

now in the journal entry section

when you make an entry in the year 2012 you get a number starting with 2012 and when you make an entry in 2013 you get a number starting with 2013

please note that when the year ends you have to add the new year numbering too 2014

so that is why i think this is a temp solution and it needs to be made automated

i think if someone could add the prefix for the Fiscal year to the sequence then this will be a good fix

i wanted to add a pic but i don't have much Karma for that