EÜR or P&L, simple or double-entry bookkeeping, issue quotations, and invoices correctly. Want to learn more about accounting and have no idea where to start?
If you are a founder, freelancer, or self-employed person who takes care of the bookkeeping yourself, you may find yourself quickly pushed to your limits without training. You then painstakingly search for what you need. Yet somehow you are always afraid of doing something wrong and getting into trouble with the tax office?
In this article, we will look into the question of what basic knowledge you need in accounting to be able to face everyday life as a self-employed person relaxed. We'll show you how you can learn bookkeeping and learn the basics in five steps and without much effort.
What awaits you today:
- What is accounting?
- Why is accounting important for you?
- In 5 steps to becoming an accounting professional
What is accounting?
Accounting records and analyzes all payment transactions within a company. The term originates from the earlier practice of recording these in book form, handwritten, and sorted according to documents. Today, software solutions or IT systems are predominantly used for this purpose. With their help, wage and salary payments, income and expenses, balance sheets, and other accounting tasks can be quickly completed.
Why is bookkeeping important for you?
Self-employed persons, entrepreneurs, and also freelancers do not decide for or against bookkeeping, they are legally obliged to do so. However, in different ways, because a distinction is made between.
- single-entry bookkeeping (freelancers, small entrepreneurs, so-called "minor traders")
- double-entry bookkeeping (companies with a certain turnover or legal form, so-called "Vollkaufleute")
- Cameralistic accounting (especially common in public authorities, which have to work with allocated budgets).
The obligation to keep accounts is basically derived from §238 of the German Commercial Code (HGB) for every commercial trader. Here, it is additionally stipulated that the bookkeeping must be such that "it can provide an expert third party with an overview of the business transactions and the situation of the company within a reasonable period of time. It must be possible to trace the business transactions in their origin and processing."
The term "merchant", to which the legal requirements refer, can be understood here in a broader sense. This is because any person acting commercially who generates a certain income is considered a merchant. In addition, other laws are in force. For example, those of the income tax law or the tax code, which prescribe who is obliged to keep accounts and in what form.
But even if these laws did not exist, it is also important for small business owners, freelancers, and start-ups to get an overview of whether and how business is going and how it can be optimized from the very beginning. And that is exactly the task of accounting as well.
5 steps to becoming an accounting professional
Whether you do the bookkeeping yourself or delegate it, it is always worthwhile to deal with the basics in order to avoid mistakes. Unfortunately, it is not uncommon for freelancers or self-employed people to realize too late that
- expenses and incomes do not stand in profitable relation to each other.
- they do not comply with legal requirements and therefore tax debts or high additional payments and late fees are to be expected.
So even if the subject may seem a bit dry, with the right guidance and software that does the routine work for you, you too will surely quickly find your way around the basics of accounting.
Step 1: Clarify the basics
As mentioned at the beginning, the legislator distinguishes between the obligation for single and double bookkeeping. In the narrower sense, only double-entry bookkeeping can actually be described as accounting.
The following are obliged to keep single-entry books
- Freelancers, regardless of the amount of their sales and profits. Who is included is regulated by §18 EStG.
- Small entrepreneurs according to §19 UStG.
Double-entry bookkeeping is mandatory for
- Companies and tradesmen with an annual turnover of €600,000 or more or an annual profit of €60,000 or more.
- Companies which, due to their legal form, must be entered in the commercial register.
Freelancers who achieve comparable levels of earnings or turnover can also voluntarily commit to double-entry bookkeeping and the accompanying balance sheet preparation. This is because balance sheet accounting offers advantages in some cases, such as in the depreciation or valuation of assets.
If you want to be registered as a freelancer in the commercial register, you can apply for this voluntarily. However, you then enter into the obligation of double-entry bookkeeping.
But first, let's get back to basics. The first question is certainly: What exactly is the difference between single-entry and double-entry bookkeeping?
Simple bookkeeping via income statement (EÜR)
With simple bookkeeping, you basically have to do nothing other than diligently collect receipts and compare your income and expenses. The whole thing, however, in a form that is comprehensible to outsiders. Even with simple bookkeeping, you need to sort your filing system well and come up with a transparent system for assigning invoice numbers and allocating receipts.
You also need to know which expenses you can deduct from your income in order to determine your annual profit. If you are subject to VAT, there is also the question of what tax rate to charge - usually 19% for goods and services and 7% for food, creative services that create copyrights.
At the end of the year, you then prepare the income statement and add it to your income tax return. What remains on the credit side at the end is your profit. A balance sheet of assets or an inventory is not required.
Double-entry bookkeeping: account assignment and balance sheet preparation
Double-entry bookkeeping is more complicated, but still understandable even for laymen. Every business transaction of your business must be recorded in accounting terms and assigned to an account. Account assignment is where you decide which account to post a business transaction to. You can pre-account the posting document with a stamp or EDP sticker. Based on the data of the pre-accounting, the accounting record is created and the accounting department knows to which account the document has to be posted. The accounting department needs the following information from a posting document:
- Posting date and posting number
- Document number and date
- Posting text
In addition to account assignment, double-entry bookkeeping also includes the preparation of a profit and loss statement and the balance sheet.
Inventory accounts represent existing values
The various accounts you set up for your accounting include inventory accounts and profit and loss accounts. Inventory accounts represent the active and passive assets of your company. For example, cash on hand, fixed assets, land, machinery, inventory, and the like are recorded here. Positive values are recorded as assets, liabilities (for example, loans that need to be repaid) as liabilities. The offsetting forms the basis of the annual balance sheet.
Profit and loss accounts record profits and losses from business transactions
Profit and loss accounts put the cart before the horse. Here, the income (sales, revenue) from business activities is compared with the necessary expenses (expenditures). The comparison shows whether and what profits or losses the company made in the fiscal year.
So as a rule of thumb you can remember: Stock accounts show the assets of a company as current stocks. Profit and loss accounts provide information about profits and losses from business transactions.
What is an accounting record and what does it do?
One of the basics of account assignment is the so-called posting record. It clarifies,
- what type of business transaction is to be booked
- on which accounts the entry must be made
Each business transaction must be posted to two accounts and recorded on the debit and on the credit side. Whether the account changes to debit or credit depends on the account type:
- Inventory accounts: Assets and Capital
- Income accounts: Expenses and income.
Example: You have bought a table at the price of 430 Euros. The amount appears on the debit side because it is business equipment. At the same time, the amount appears on the credit side as a posting amount in the cash register.
Inventory accounts include all accounts in the balance sheet. However, a distinction is made between asset and liability accounts.
These can be fixed assets such as office equipment or cars or receivables from services and deliveries. Here you should remember that additions are booked in debit and disposals in credit.
The opposite is true for liability accounts. Here, additions are booked in the credit and disposals in the debit. Liability accounts can be, for example, loans, equity, or liabilities to suppliers.
You should always keep the appropriate document for a posting. Only in exceptional cases, such as account maintenance fees, is there no receipt for postings.
What is and how do you create a profit and loss statement?
What the EÜR is to the freelancer, the profit and loss statement is to the trader. As part of the annual accounting, it provides information about your name components: about profits and losses of your business.
For their determination, the accounting system provides a separate P&L account, in which all data from expenses and income of the profit and loss accounts are entered. The closing of the P&L account is booked out via the equity account.
The P&L account can therefore be a simple comparison of credit and debit. This is then referred to as a breakdown by account form. On the debit side, all expenses from the profit and loss accounts appear, on the credit side the profits and revenues from the income accounts. Alternatively, you can note and calculate profits and losses chronologically staggered.
Furthermore, a distinction is made between the nature of the expense method and the cost of sales method. In the total cost method, the units of production are used to calculate income and expenses. In the cost of sales method, the units sold are the decisive calculation factor.
So you have different possibilities to create your P&L. However, you have to choose one of them for several years in order to keep the results comparable.
In summary, the process for creating your P&L is as follows:
- set up the profit and loss accounts (income and expenses)
- entry and posting of the respective business transactions (for example rents or lease fees, sales, interest income)
- transfer to the P&L
- balance calculation for income and expenses
The balance is the respective difference between debit and credit. The balance amount for expenses is entered on the debit side of the income statement. The balance amount for income is recorded on the credit side. From the final comparison of the balances, it can then be seen whether the company has achieved profits or losses in the past financial year with regard to its business transactions.
How do I create a balance sheet and what is it?
The annual financial statements of a company are made up of the income statement and the balance sheet for assets. The P&L goes into the annual balance sheet as a component of equity.
The balance sheet is divided into assets and liabilities. Assets are all assets, including cash on hand or receivables. Liabilities are capital assets (debt and equity) and liabilities. Both items are also referred to as inventory. Which ones are included in detail and how they are to be prepared is regulated in §266 HGB.
In order to be able to carry out accounting, you must therefore carefully record all values in the current fiscal year. In addition, an inventory is now required, i.e. you compare the actual stock of assets with the target stock.
In addition, as part of the accounting process.
- close the double-entry bookkeeping accounts on the balance sheet date.
- reconcile assets and liabilities to inventory results.
- prepaid expenses and deferred income are determined.
- created accruals.
Accruals are liabilities that will be incurred in the foreseeable future but whose amount is not yet known.
Step 2: Know and consider GoBD
The abbreviation GoBD refers to the "principles for the orderly keeping and storage of books, records, and documents in electronic form as well as for data access" as stipulated by the legislator. These principles were newly enacted in 2014 because bookkeeping today is hardly ever done by hand and instead electronically.
The concept of bookkeeping was therefore explicitly extended in the new regulations to include the electronic processing of the respective data and balance sheets. In addition, companies now also fulfill their obligation to retain relevant receipts and documents if they archive them in electronic form.
As before, the taxpayer is solely responsible for proper execution and storage. In terms of accounting, he must also adhere to a number of principles for the entire duration of the retention periods of documents. These concern their
- Traceability and verifiability
- truth, clarity, and continuous recording
- Timely posting and recording
- Unalterability with regard to the entries and documents.
What this means in detail was listed by the Federal Ministry of Finance in a letter in 2014.
Step 3: Debit and actual taxation
If your self-employed activity does not fall under the small business regulation, you are obliged to charge sales tax on your products or services. You have to pass this on to the tax office at regular intervals. When this takes place depends on two factors
- the amount of sales tax collected, and
- whether you have chosen debit or actual taxation, or which of these taxation methods you are obliged to use.
The amount of sales tax collected determines whether you can pay it
- once at the end of the year (up to 1,000 €),
- several times at the end of each quarter (up to 7,500 €) or
- monthly (more than 7,500 €).
This can be problematic if, for example, you report a high VAT amount in an invoice at the end of a quarter that is not paid until the following quarter. Therefore, companies and freelancers who do not exceed certain sales limits have the option of opting for debit or actual taxation.
If you choose debit taxation, this means that the invoice date and the tax due date fall on the same date. If you have to submit your advance VAT return at the end of each quarter and issue an invoice on March 30, this would mean that the VAT on the invoice is still due in the first quarter and must be paid to the tax office. Even if the payment is actually received later.
The situation is different for actual taxation. If the amount due in our example is not received in your business account until April 14, the sales tax included in it will not be due until the end of the second quarter.
If you opt for actual taxation, the cash flow is taken into account for sales and thus revenues. The sales tax is only due at the time of payment by the customer. For purchases and thus expenses, you may claim input tax at the time of purchase. Here again, the time of payment is not considered.
The tax office grants the actual taxation on application only to
- members of the liberal professions
- self-employed persons who are not obliged to keep double-entry accounts
- companies whose sales are less than €600,000 (as of 01.01.2020) per year
Step 4: Create offers and order confirmations
An important part of the work of freelancers and service providers consists of creating offers. In it you specify at least:
- the type and scope of the service provided
- the beginning and end of the service
- a total price or an hourly fee that you will charge
- payment and delivery terms
- the sales tax rate you will charge
as well as other important information that is relevant in connection with your offer. A reference to your terms and conditions or the place of performance can also be useful.
To enable you to respond quickly to inquiries from interested customers, it is best to create an offer template that can be flexibly adapted. Keep in mind, however, that offers that do not contain any indication of their non-binding nature or a time limit is binding. Therefore, it is best to include wording such as "all offers without guarantee" or "offer is valid until DATE".
In order to make your offer appealing to customers, you should not formulate it too succinctly and pay attention to an attractive design. This is especially true if you work in the creative field. In addition, you should make it clear to the customer what your offer is based on excellent support even after the order has been fulfilled, for example. Or intensive research and analysis of his special needs before the order is fulfilled.
Last but not least, remember that you may incur costs for phone calls, printing, purchasing images, or shipping - and include these in your offer planning.
If the customer accepts the offer, a binding contract is concluded. Ideally, you should summarize the terms of the contract in an order confirmation. You should also always send a written order confirmation (also possible as a file attachment) if only verbal agreements have been made beforehand or if you or the customer have made changes to the offer that was originally sent out.
Step 5: Write a professional invoice
While there are hardly any legal requirements for the form of the offer letter, this looks different for the invoice. So, to avoid getting yourself and your customers into trouble, you need to make sure that all mandatory information is included. This includes:
- Name and address of the issuer of the invoice
- Name and address of the recipient of the service
- The sales tax identification number for businesses subject to sales tax. In the case of VAT-exempt companies, the personal tax number and a note that no VAT was charged in accordance with §19 UStG.
- Invoice date and consecutive invoice number
- Date of delivery, date of performance, or date or period of the service
- Type and quantity of the product or scope/duration of the service
- Price information (net amount, sales tax, and total gross amount)
- Reference to the obligation to keep records, if the invoice is subject to tax regulations.