Bookkeeping & Accounting: In depth for beginners

The following applies to all self-employed entrepreneurs: At the end of the financial year, the tax office would like to see a profit calculation to assess taxes. For founders, the requirements for bookkeeping and accounting are often difficult to understand. Because which requirements you have to meet depend heavily on your company’s legal form and the sales and profits achieved. Here you get the perspective in the jungle of bookkeeping & accounting.

What does financial accounting include?

Bookkeeping & accounting or bookkeeping – these terms make founders despair. Because they seem to mean a similar thing and many people also use the individual terms synonymously. Here, there are significant differences.

The following overview sheds light on the darkness:

Business accounting

Management accounting includes internal and external accounting. Here you document all the facts about income and expenses, liabilities, and the like to have the necessary information about the financial situation ready for the company and external third parties such as the tax office, banks or shareholders, and investors. You are accounting to get control of the finances and undertake the further planning investments before.

Bookkeeping

Accounting is a branch of business accounting. It primarily includes the general ledger (financial accounting), which is part of a company’s external accounting. The records are subject to tax legislation rules and must be kept in a certain form.

accounting

Bookkeeping is the name of the department in which the employees, i.e., the accountants, do the bookkeeping.

Why are bookkeeping & accounting so important?

With bookkeeping & accounting, entrepreneurs not only keep an eye on income and expenses, but they also meet the requirements of the legislature. Overall, operational accounting and clean bookkeeping bring the following pluses:

• The self-employed are obliged to keep the books properly and completely at all times. The tax office, courts, and auditors must be able to understand the entries when viewing them. In addition, identify companies on accounting the profit. If you do not report your income correctly, you are guilty of tax evasion, forget to report expenses, and bear an unnecessarily high tax burden.
• You can only win bank loans, subsidies, and investors with hard numbers. You can use bookkeeping and accounting to prove the success of your company to date. With founders, the bookkeeping results in the first three or six months are considerably more convincing than the assumptions made in the business plan. It does not work for companies that exist for a great time without concrete figures showing the development.
• As the founder, you have drawn up a financial plan. With bookkeeping & accounting, you can now check at any time whether your assumptions were correct, whether we will exceed them or whether additional capital will be a requirement.
• With bookkeeping, you can trace the development of your company in retrospect. It does not only help to identify mistakes and avoid repetition. For startups, these numbers are the best argument for price negotiations if the company is to be sold in the exit phase.

Which companies keep the accounts?

Bookkeeping & accounting are an issue for all companies; after all, the tax office expects a legitimate profit determination. If the legislator provides for the accounting obligation, the accounting is always meant.

For founders and small business owners, a simple profit calculation (so-called income surplus calculation ) is usually sufficient at the beginning to organize the finances. After all, not too many transactions are to be expected at the beginning of the business activity. Later on, it can make sense to do a voluntary balance sheet because it offers a better overview and security.

Whether you are allowed to work with the simple calculation of profits or obligated to accounting depends on various factors.

• Corporations like GmbH or AG have no choice. You are obliged to report. At the rear of each fiscal year, you have to draw up a balance sheet and publish the business results in the Federal Gazette.
• Registered merchants (eK) must report if they generate more than 600,000 euros in sales or 60,000 euros in profit per year.

Non-merchants (i.e., sole proprietorships or a GbR) must report if the annual turnover exceeds EUR 600,000 or the annual profit exceeds EUR 60,000.

Who does the simple determination of earnings (EÜR) apply to?

Which bookkeeping and accounting obligations a founder has to fulfill is not necessarily obvious at first glance. However, once you understand the rationale, it’sit’s clear, such as

• For small businesses, small businesses, and registered traders, there are easements in bookkeeping and accounting, provided that the annual turnover does not exceed EUR 600,000 or the annual profit does not exceed EUR 60,000. They are also allowed to use simple bookkeeping with the EÜR.

How does the simple profit determination work?

Even the simple determination of profits (so-called income surplus calculation ) is tied to certain rules. Still, in principle, it is really easy to organize bookkeeping and accounting in this way. Because basically, you compare your income and expenses. Therefore, you should design your internal bookkeeping so that we can determine all the relevant values ​​can be easy. You create the EÜR according to the following model:

1. Determination of profits

Operating income (net)

+ VAT collected

2. Business expenses

Depreciation for wear and tear

+ Space costs and other land expenses

+ other unlimited deductible business expenses

+ limited deductible business expenses

+ Car costs and other travel expenses

+ included input tax

+ paid sales tax

Determination of taxable profit or loss: Sum of operating income – Sum of operating expenses

3. Supplementary information

Hidden reserves and reserves

4. Additional information for sole proprietorships

Withdrawals and deposits i. S. d. Section 4 (4a) of the Income Tax Act

How does double-entry bookkeeping work?

If you are among the founders who are subject to bookkeeping obligations (e.g., by founding a GmbH), you must, of course, know what needs to be considered when doing double-entry bookkeeping.

What are the criteria for double-entry bookkeeping?

Every entrepreneur – including small businesses – can voluntarily opt for double-entry bookkeeping. However, certain groups are required to keep double-entry bookkeeping. It includes:

• All companies registered in the commercial register– e.B. the legal forms OHG, GmbH, or AG are among them.
• registered merchants whose turnover exceeds EUR 600,000 or whose profit exceeds EUR 60,000 annually
• Tradespeople not registered in the commercial register whose turnover exceeds EUR 600,000 or whose profit exceeds EUR 60,000 per year

Entrepreneurs who do not meet these criteria get an allowance to create the simpler EÜR.

Bookkeeping and accounting: the accounting

In simple bookkeeping, operating income and operating expenses are compared. In contrast, with double-entry bookkeeping, a comparison is made between the business assets at the beginning. And the business assets at the end of the financial year.

It works like this:

• Opening balance: On the anniversary of the company’s founding, create the so-called opening balance sheet. To do this, you create a list of your assets and debts on this date. It also includes an inventory.
• Closing balance: At the end of the year, you carry out a new inventory and determine the number of assets and debts.

You can determine the business assets using the formula :

(Fixed assets + current assets) – Debt = business assets

The following also applies:

• The sum of the business assets on the closing balance sheet minus the sum of the business assets on the opening balance sheet – increased by the value of the withdrawals and reduced by the value of the deposits – shows how much profit or loss the company has made.
• The balance sheet items are compared with the various bookkeeping accounts.
• The annual financial statement forms the balance sheet and the associated profit and loss account (P&L).

Special features apply to tax accounting for partnerships.

Tip: Many companies seek support from a tax advisor in drawing up the annual resolution.

Bookkeeping & accounting: double-entry bookkeeping

The basis for the preparation of the balance sheet is double-entry bookkeeping, as the balance sheet consists of different accounts. How many and which accounts are in need depends on the size and legal form of the company. These factors determine how the balance sheet structures.

There is always one principle:

Each posting carries out twice because it posts on the debit side and the credit side.

There are so-called posting records to correctly carry out the postings on the various accounts on the debit and credit sides. They are the instructions on how the amounts are to be booked in the accounts. The booking record is noted on the receipt before each booking. This setting of the posting rate is called account assignment. In bookkeeping & accounting, a booking record is always structured according to the principle of debit after credit.

That sounds more complicated than it is, a few examples make the procedure clear:

• A customer pays a due invoice for 300 euros by bank transfer. The associated posting record is Bank account to receivables 300 euros. On the active half of the balance sheet (the bank account), the liquid funds increase by 300 euros, while on the other hand, the receivables shrink by 300 euros.
• A customer pays 200 euros in cash and transfers the remaining amount of 150 euros. The total amount is therefore 350 euros. The booking rate is cash 200 euros, bank account 150 euros to accounts receivable 350 euros. Here the next principle becomes clear: a total of debit postings = total of credit postings.

Tip: Accounting software saves the booking records for certain incidents and carries them out automatically. It reduces the error rate.

 Double-entry bookkeeping should show all commercial transactions and all assets

Anyone who is obliged to keep accounts must keep records of all business activities. The double-entry bookkeeping should show all commercial transactions and all assets. For this to work, the bookkeeping keeps “twice” in two books. It is where the name of double-entry bookkeeping originally comes from. The books are as follows:

• the land register, also called the journal
• the general ledger, also known as general ledger accounts

The land register takes on the chronological order of business transactions. Recording all processes with the date, number, receipt, and amount from the relevant account and the associated contra account. The cash book, incoming and outgoing invoices are typical for the land register.

The general ledger takes care of the factual order. The balance sheet is received from the accounts in the general ledger. Subsidiary books such as a goods book or a payroll book can support double-entry bookkeeping.

Tip: You must keep receipts, invoices, and balance sheets for at least ten years. You can find more information on retention periods here.

What does business accounting fall under?

Bookkeeping and accounting nowadays do a lot more than considering financial aspects such as income and expenses. Double-entry bookkeeping has existed in its main features since the 16th century. Still, the modern form of bookkeeping & accounting gives you important information about the current state of your company. Because since the beginning of industrialization, the structures and tasks in bookkeeping and accounting have developed rapidly. In addition to recording accounts receivable and payable (debit and credit), modern bookkeeping collects and analyzes all key figures that a self-employed person needs to manage to assess his company’s profitability and plan for the future.

Tasks and structures

Bookkeeping and accounting have the task of all economic transactions that are valuable and capture quantitatively leave, recorded, and evaluated. The following structures characterize the current corporate accounting:

• Bookkeeping, especially financial accounting (Fibu)
• Cost and performance accounting, also known as business accounting
• Comparative calculation or statistics
•  Planning calculation

Accounting duties

Bookkeeping is at the heart of corporate accounting. Here you map all business transactions as planned and without gaps. The accounting department thus provides the basic data for all further calculations in corporate accounting.

Tasks of cost and performance accounting

As part of cost and performance accounting, you monitor the profitability of your company. The raw data of the bookkeeping in connection with the imputed costs are used in this area to determine the prime costs. You proceed separately according to departments and products to get a precise overview. At the same time, the cost and performance accounting provides the necessary figures for the following :

•  Annual financial statements
• Comparative calculation
•  Planning calculation

Comparative calculation tasks

With the comparative calculation (statistics), you evaluate the figures obtained in the bookkeeping and the cost and performance calculation. These calculations form the basis for the planning calculation.

Comparative calculation tasks

With the comparative calculation (statistics), you evaluate the figures obtained in the bookkeeping and the cost and performance calculation. These calculations form the basis for the planning calculation.

Planning accounting tasks

All knowledge from the entire company bookkeeping flows together and enriches with knowledge about external facts and developments. To get the necessary facts to economic decisions for your company to meet.

Invoicing programs for founders

Founders and established self-employed entrepreneurs have to deal with bookkeeping and accounting but invoicing is also one of the important tasks. Writing invoices may not be productive, but without an invoice, there is a lack of income. Electronic invoice programs are available as an offline version for permanent installation on the PC and an online version that you can access anytime and anywhere. Regardless of which variant you choose, you will enjoy the following advantages :

• considerable time savings in invoicing
• flexible programs that process different tax rates or foreign invoices without having to create a new template
• automatic overview of invoices issued and outstanding payments
• if necessary, creation of reminders at the push of a button
• Possibility of linking offers, invoices, and reminders

Tip: Many invoicing programs can be linked to an accounting program and automatically forward the relevant data to the accounting.

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Which accounting programs are suitable for founders?

Good accounting software can make business bookkeeping easier for founders as well as seasoned entrepreneurs. Entrepreneurs generally have the following entitlement to accounting programs :

• inexpensive
• easy to handle
• extensive help functions
• Check routines that detect and report errors or missing information.

Do founders need a tax advisor?

Whether you need a tax advisor for your young company depends heavily on the legal form you choose. There is no obligation to hire a tax advisor to prepare the financial statements. Your previous knowledge and your will (or your time) to familiarize yourself with the topic also have a major influence on whether you should seek help or not. After all, an EÜR is easier to manage than double-entry bookkeeping and accounting.

Do founders need control for bookkeeping & accounting?

The simple answer is: “Yes”! Business founders should keep a close eye on finances from the day of their foundation. It takes time and is usually not much fun, but it saves you from suddenly facing financial disaster. Constantly monitor income and expenses. In this way, you will notice in good time when certain items are getting out of hand, and your company got threats with difficulties. Only those who know their numbers can counteract them in time.

Frequent questions about bookkeeping and accounting

Bookkeeping & accounting: how do I create a financial plan?

You create a profitability forecast and a liquidity plan. You use the results to formulate the financial plan.

What does accounting have to do with entrepreneurship?

Only those who plan their corporate goals in the short, medium, and long term will be successful. Accounting provides the basis for business decisions and planning.

How should business startups design corporate accounting?

In the beginning, you should keep bookkeeping & accounting as simple as possible. If you are not subject to the accounting obligation, an EÜR is sufficient at the beginning.

Professional and commercial income: separate accounting?

These different types of income get treatment separately for tax purposes, so you should keep separate bookkeeping and use separate business accounts.

The information and advice from the Chamber of Industry and Commerce for Munich and Upper Bavaria are a service for their member companies. They only contain initial information and therefore do not claim to be complete. Although their creation was with the greatest possible care, they can accept no liability for their accuracy regarding the content. They cannot replace advice in individual cases (e.g., from a lawyer, tax advisor, management consultant, etc.).