Keeping the cash book - important terms & legal requirements

Many accountants underestimate the importance of cash accounting. In practice, cash accounting often resembles pure chaos. Yet keeping a proper cash book is not difficult.

The tax office, on the other hand, has recently turned its attention more and more to auditing the cash books. Too often, the state has lost corresponding tax revenues through concealed sales. If the auditor rejects the cash book as not being in order, you will quickly end up in the devil's kitchen as an entrepreneur. In the following article, you will learn everything worth knowing about cash accounting.

    Definition

    The cash accounting records the income and expenditure of the internal cash in cash. All business transactions of a company that are paid in cash are recorded in the cash book. As part of the accounting system, the cash book simplifies the management of the cash in the form of a help book.

    Why is it necessary to keep a cash book?

    In some branches of business, such as gastronomy or retail, as a self-employed person, you have to deal with a huge amount of cash payments. The legislator has taken precautions at this point. In order to prevent the embezzlement of sales and thus massive tax evasion, entrepreneurs are obliged to keep cash books. All payments and withdrawals are recorded in writing or digitally in the cash book. The characteristic form of the account compares both items, from which the balance is finally formed. This difference not only shows how much money is in the cash register, the balance is an important item when preparing the annual accounts. When you keep a cash book, you include, in addition to each transaction, the corresponding accounting documents.

    The tax authorities demand correct accounting!

    Why do I have to keep a cash book as an entrepreneur? The answer is obvious. Your cash book is an exact copy of what is in your cash box. It records your cash transactions and the balance is of interest not only to the accounting department and your tax consultant but also to the tax office. In order for your cash book to be an accurate reflection of your cash, daily cash accounting is very important. Moreover, the chronological order of all items must be correct. The creditors of your company and the tax authorities demand correct accounting - and the cash book is one of them.
    Important: It is always the accountant, the entrepreneur himself, who is responsible for the correct accounting and therefore also for the cash bookkeeping. In other words, this means that you as an entrepreneur are liable for all errors and discrepancies in your cash book!

    Who has to keep a cash book?

    Not all self-employed persons are obliged to keep a cash book. The type of business determines the obligation to keep a cash book. If you are a freelancer or run a small business, you only need to create a surplus income statement (EÜR) and do not need to keep a cash book.
    In principle, only those entrepreneurs who are obliged to draw up a balance sheet are employed. Companies that are listed in the commercial register must also keep a cash book. Those who are not in the commercial register only need to draw up their cash book if the nature and scope of their business requires a commercial operation.

    Why it is still worthwhile

    If you only have to prepare a revenue surplus statement for the tax office, you do not need to create a cash book. Nevertheless, it is advisable to keep a business book, especially in the retail trade. Especially small and medium-sized companies, which mainly work with cash, benefit from cash accounting. With the cash book, you get a crystal clear overview of all cash items - even if you are not actually obliged to do so. Companies that have to draw up a balance sheet have to manage much more complex accounting. GmbHs, for example, are obliged to keep a cash book in addition to double-entry bookkeeping.

    Overview of all companies with cashbook obligation

    • Companies with commercial register entry
    • Companies obliged to accounting and double-entry bookkeeping
    • Businesses that require a commercial business operation in terms of scope and type

    Keep cash book: small business & freelancer

    Small business

    If your annual turnover does not exceed 600,000 euros and your profit is a maximum of 60,000 euros, you belong to the group of small businesses. In addition, you may not choose a legal form for which the obligation to prepare accounts applies. This includes the already mentioned GmbH.

    Freelancer

    The category of freelancers (https://sevdesk.de/lexikon/freiberufler/) includes, for example, doctors, tax consultants, and lawyers as well as most artistic, scientific, teaching, or educational professions. Thus, consultants, designers, journalists, and translators also belong to the so-called liberal professions. The status of the freelancers is independent of their profits and turnover.

    Attention: According to § 146 AO every entrepreneur is obliged to make an individual record of all sales. The obligation to keep a cash book results again from § 146 AO in connection with § 22 UStG. However, the recording in the form of a cash book is only necessary if the entrepreneur is obliged to pay sales tax according to § 22 UStG. Thus, although small traders are obliged to prepare each income individually, they do not need to keep a cash book. Self-employed persons in the liberal professions do not fall into this category at all and for this reason, are not required to keep a cash book.

    CTA AüG-1

    Important terms in cash accounting

    Cash register, cash book or cash register? Within cash accounting, terms are often used synonymously that strictly speaking do not describe the same object. Detailed explanations of the individual terms can be found here:

    • Cash book (Kassenbuch): The cash book records all business transactions of the company that were paid with cash.
    • Cash register (Registrierkasse): A recording device that deducts the turnover from the cash and creates a receipt for it. The cash register is used for the sale of goods and services.
    • Cash register (Barkasse): A cash register is a concrete object. With the cash balance of the manual cash register, for example, smaller expenses can be settled.
    • Cash desk (Kasse): Deposits and withdrawals fall under the abstract term "cash register". The term "cash" is again found in the cash book.

    What does a properly kept cash book look like?

    If you are obliged to keep a cash book or if you want to record your cash transactions voluntarily, you should consider the following points.

    The structure of your cash book

    Whether in writing or digitally: every entry in the cash book always includes the following information:

    • Marking of the entry as Income or expense
    • The date
    • A unique document number such as the invoice number
    • Explanatory booking text like "business lunch" or "envelopes"
    • Net amount and currency cash receipts or payments
    • The sales tax rate in percent (7 or 19 %)
    • Value-added tax amount
    • Final balance of the cash or balance
    • Receipt

    As a general rule, you should keep your cash book in account form. This means that you compare your income and expenses to create a balance in the last step. The balance indicates how much money is in your cash box. If your company has to keep a balance sheet, this amount will be included in your annual accounts or in your balance sheet.
    Furthermore, each entry requires a receipt. The cash book must at all times correspond to the actual cash balance. It is not for nothing that the Cash Book is considered as a subledger or auxiliary book of the accounting. It is therefore subject to all the legal regulations that already apply to your accounting. The final balance of the Cash Book is found in the balance sheet under Current Assets.

    Cash book corrections

    Of course, you can make mistakes when keeping your cash book and when entering new entries. While corrections in analog cash books are more complicated, digital books for small carvers usually provide gallant solutions. With your analog cashbook, you should first and foremost make sure that you do not simply black out or otherwise make the original, incorrect entry unrecognizable. You would immediately have the attention of the tax office on your side. Corrections to the cash book are always made as follows:

    1. mark the erroneous entry and make sure that the entry remains legible
    2. create a new entry. The modification of the entry must be comprehensible to an outside person.

    The same rules apply, of course, not only to analog but also to digital cashbooks. If you are working with a software program, you are not allowed to simply delete entries here either. Corrections must always be visible and traceable.

    Typical cash accounting errors

    There are a number of errors that seem unimportant at first sight, but which should not happen in proper cash accounting.

    1. the most common error is found among the receipts and issues that have not been recorded as entries. You must also record in the cash book any payments from the business account and private withdrawals.
    2. since the cash book cannot be changed afterward, there is no need for modifiable files such as Excel to keep a cash book.
    3. many entrepreneurs like to leave one line free between entries in their paper cashbooks. Why? Because it looks tidier and clearer. However, the tax office punishes this love of order as a misdemeanor, because the blank lines offer space for subsequent entries. With the entries added later, you could finally try to make your balance sheet look better.
    4. another mistake is not to store documents directly in the cash book. If you are still working with classic analog books, you should collect receipts directly in your cash book. If you use a digital program, all vouchers are scanned and saved.
    5. It is also prohibited to keep your books solely for accounting purposes. As the person responsible for the cash book, you are obliged to count the cash on hand regularly. Regardless of how accurate your cash bookkeeping is and how error-free most programs work, you should keep track of all entries.
    6. regularly compare the calculated balance with your cash balance. If there are any discrepancies, you should find and correct the error as soon as possible.

    The storage obligation is also 10 years for cash accounting. So keep the cash book itself and all receipts for 10 years.

    If you do not keep your cash book properly, this can have far-reaching consequences. Usually, the tax office will add the amount of the reported income. If you intentionally keep your cash book incorrectly, the tax office will, in the worst case, consider this to be tax evasion. Interestingly, the rules of proper cash bookkeeping also apply to entrepreneurs who voluntarily keep their cash book but are not obliged to do so.

    Legal requirements for cash accounting

    In order for your cash book to be classified as compliant, it must meet several requirements:

    • Completeness and chronology: According to § 238 Abs. 2 HGB the cash book must always be kept chronologically. All entries may only be in the correct chronological order.
    • Revision security: Whether digital or analog - your cash book must be kept in a way that it cannot be changed afterward. For this reason, Excel cashbooks are hardly within the range of what is allowed. Books in paper form must be free of blank lines, while entries may not be entered with a pencil or similar writing instruments.
    • Storage obligation for 10 years: According to § 257 Abs. 1 and 4 HGB, entrepreneurs are obliged to keep the legal storage period of 10 years. In a period of 10 years, you have to archive not only the cash books but also all documents that have to be kept in an orderly manner.
    • Prompt processing: With § 146 paragraph 1 AO the legislator regulates the processing period of your daily cash income. If a cash transaction has taken place, you should enter the entries at the latest the next day. This is the only way you can prove that you did not add entries at some point and thus improve your balance sheet afterward.
    • Comprehensibility: According to § 145 AO, an expert third party must be able to get an overview of your cash book, the included business transactions, and the situation of your company within a reasonable time.
    • In German language: According to § 146 Abs. 3 AO the cash book may be led in principle only in German language. If you use another language, the tax office will ask you for a translation. You must also be able to explain symbols and abbreviations upon request.
    • No booking without a receipt: According to § 238 Abs. 2 HGB you are not allowed to make an entry if the corresponding invoices, receipts, or cash slips are not available.
    • Individual recording obligation: All entries must be listed individually in the cash book. Excluded from this rule are businesses that handle a large number of cash transactions every day. In this specific case, it is sufficient to enter the daily balance. With the help of a cash register, all incoming and outgoing transactions can be verified in an audit-proof way as a cash report.

    These legal requirements apply to all those who keep a cash register book. Small businesses and freelancers who voluntarily set up their cash book must also adhere to the regulations of proper cash bookkeeping!

    Your cash book as balance sheet item

    The cash book is an essential part of the balance sheet of your company. Within the profit and loss account, which you present to the tax office at the end of the year, cash transactions are also included. The balance of your cash book is recorded as an asset under the item "Current assets". Under § 266 HGB (German Commercial Code) you will find the exact regulations for the balance sheet classification.

    Is incorrect cash accounting punishable?

    As an entrepreneur, you are legally obliged to keep proper bookkeeping and accounting. After all, among other things, your cash books are the basis for taxation. The state primarily secures its tax revenues through the laws. The tax office serves as a middleman in this respect. Your books must therefore always be traceable by an expert third party. It is not for nothing that you have to keep every single invoice for a long time. No company may disregard the legal requirements. Therefore, there is a risk of incorrect cash accounting:

      • Fines
      • Commercial law sanctions
      • Additions
      • In case of justified tax evasion even imprisonment

    Errors in the cash bookkeeping in the context of improper financial accounting are not accepted by the tax office. In case of missing data or subsequent corrections, the tax office may return the submitted documents and request the entrepreneur to correct missing or incorrect data. In serious cases, there is a risk of unfavorable estimates, the withdrawal of tax benefits, or even criminal tax proceedings.

    How to keep a cash book with the right tools

    Keeping manual cash books with Word and Excel templates

    With a cashbook template for Word or Excel, forms can be created and printed quickly and easily. The only requirement for the free use of the documents here is the presence of the software on your own computer. For smaller companies with manageable cash movements, this manual solution can be worthwhile. The important thing here is the difference between working with the software and printing the forms. Keeping the cash book with an Excel file does not comply with GoBD guidelines and is therefore not permitted. After all, cash book entries could be edited at any time in programs such as Word or Excel.

    Handwritten cash book

    For those who still prefer to work with handwritten documents, there is the option of printing the document created with Excel and filling it out by hand. The cash book template must not yet contain any entries. The forms are then considered as an analog cash book. However, all those who rely on manual work must comply with the regulations of the legislator even with this cash book form. Thus, the Excel or Word template should have the following names in the header rows:

    • opening balance
    • Current cash balance
    • Income and expenditure

    The following must be specified for each individual transaction:

    • The sequential number
    • The date
    • The amount
    • Value-added tax with tax rate
    • receipt

    Depending on the number of entries, the report is closed and signed daily, weekly or monthly.

    Electronic cash management with online tools

    In addition to free cash report templates and cash book samples, which are available online, various online tools are suitable for creating the cash book. There are several cashbook software available on the market. The main advantage: Your accounting is accessible from any location in the cloud. As an entrepreneur, you save a lot of time when creating the cash book, cash counting protocol and cash report with the right tool. If you handle a lot of cash transactions every day and have to spend too much time on your accounting, you hardly have time for your core business.
    At this point, the cashbook online is a browser-supported tool with which you can do your cash accounting online. This means that you enter your cash vouchers directly via the Internet. While you are entering your receipts, the online tool checks your entries for completeness on an ongoing basis. You can easily comply with the principles of proper accounting using online tools.

    Cash accounting with accounting software

    Keeping cash books by hand is prone to errors and very time-consuming. A simple twist of a number can ruin all your work. If this happens, the entire cash book must be corrected. With a powerful software, these problems can be easily avoided. Moreover, the accounting software is effective and time-saving. Another advantage is that the sophisticated financial software saves you a lot of computing work while keeping a constant eye on your cash balance.

    Young entrepreneurs who are just starting out on their own often ask themselves whether they can leave their bookkeeping to a tax consultant. There is no contradiction between accounting by a tax consultant and your own financial software. The two options are not mutually exclusive - on the contrary: If you keep your accounting in view on a daily basis, you can also communicate better with your tax advisor. A really good accounting software is self-explanatory. Practically as a side effect, it shows you how to keep a cash book correctly.

    Conclusion

    A proper cash management helps you to avoid giving the tax office any room for additions. Consulting supports you with your cash accounting and relieves you of the manual accounting. The only thing that is important with the handwritten cash accounting is that the principles of proper cash accounting are observed. It is not for nothing that regular estimates are made during tax audits. If auditors find an incorrect cash accounting, the entire accounting can be questioned. A small negligence can have massive financial consequences. The consequences can be far-reaching. If the entire accounting is no longer conclusive, the tax office can plead tax liability.

     

    CTA AüG-1