Accounting records all payments such as income from sales, expenses for raw materials and supplies or the servicing of liabilities. Investments and the associated depreciation also fall within the scope of accounting. Particularly in the case of income and expenses, comparisons can then be made between individual months, quarters or fiscal years. The fundamentals of accounting are subject to tax law constraints to a large extent. In principle, all corporations, merchants and companies that operate an independent trade are required to keep accounts. So-called non-merchants, such as sole proprietors or the GbR, are exempt from the obligation to keep accounts if the profit does not exceed 60,000 euros or the turnover does not exceed 600,000 euros per year.
The exemption from the obligation to keep accounts cannot exempt a self-employed person from properly documenting his income and expenses. For example, according to the EStDV §60 Abs. 4, freelancers must record their cash flows in an Einnahme-Überschuss-Rechnung (EÜR). Furthermore, possible business partners such as banks want to gain an exact overview of the business situation of the young company in order to be able to make a decision for overdraft facilities or for loans for upcoming expansion investments. For these reasons alone, it is a sensible matter for every self-employed person to pursue proper accounting after the foundation. In addition, bookkeeping provides every start-up or entrepreneur with an overview of all important business transactions. Thus, one can read from their accounting figures how the liquid assets of the company stand, which sales were made with which business partners within a certain period of time, which receivables are still open or which liabilities are still to be paid.
If an entrepreneur fails to comply with the basic accounting requirements, the tax office may issue a tax assessment. Most of the time a tax assessment then leads to a higher financial burden for the company.
The basics of accounting also include that accounting starts before the foundation. This is because you can claim costs incurred in connection with your self-employed activity even before you set up as business expenses after you have set up. In this way, you reduce the taxable profit in the first business year. However, you must collect and keep all receipts properly for this purpose.
Even before you start with your actual accounting, you will receive mail from the tax office after registering your company. This includes the so-called questionnaire for tax registration (Fragebogen zur steuerlichen Erfassung). The tax registration questionnaire is closely connected with the tax number. You will receive it after returning the questionnaire to the tax office. You will need the tax number for writing invoices. As an alternative to the tax number, you can also apply for the VAT identification number. This is especially important if you want to issue invoices abroad.
Using accounting principles, a distinction is made between single and double-entry accounting. Single-entry accounting is only permitted for so-called non-merchants. Non-merchants include small traders, freelancers as well as forestry and agricultural workers and traders with a turnover of less than 600,000 euros in two consecutive financial years and a profit of less than 60,000 euros per year. All other self-employed persons are required to keep double-entry accounts.
In single-entry accounting, the usual payment flows are recorded in orderly accounts. Receivables and liabilities are not recorded after the company foundation. The single-entry accounting is evaluated by the tax office via a so-called Einnahmen-Überschuss-Rechnung (EÜR).
If sales and profits are below 600,000 euros and 60,000 euros per year, respectively, and the company is not registered in the commercial register (sole proprietors, small businesses, GbR), it is sufficient to prepare a simple income statement (EÜR)an income statement.
In double-entry accounting, all business transactions, i.e. payment flows, are booked to several accounts. The booking happens according to the principles of accounting either on the debit or on the credit side. It should also be noted that in double-entry accounting, each branch has its own systematic list of accounts, the so-called chart of accounts. The creation of the required account classes and account groups is not a trivial matter in double-entry accounting.
Double-entry bookkeeping/accounting must be carried out by all companies that are registered in the Commercial Register. It also applies to all companies that exceed the thresholds specified for single-entry bookkeeping. There is an exception for registered traders – they can also prepare a revenue-surplus account below the thresholds.
Being familiar with accounting not only avoids running into troubles with the tax office, but also helps you to always be in control of your company, detect arising problems fast and improve inefficiencies. If you are interested in learning more about the topic, we recommend you check out this free course: London Imperial College: Accounting Essentials (https://www.edx.org/course/accounting-essentials?index=product&queryID=810ecf18bda5addf2e1c2d7240ddd44a&position=3)
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