Learning Accounting: With These Tips, You Will Become an Accounting Pro

1. 1. What is the definition of bookkeeping?
2. 2. Accounting takes into account business transactions
3. 3. Accounting is important for you and your company
4. 4. For entrepreneurs, there is an obligation to keep books
5. 5. Your accounting plays a crucial role in your annual financial statements
6. ‍6. Simple or double-entry bookkeeping? What's the difference?
7. 7. Become a bookkeeping specialist in 7 steps
8. 8. There are some tips to learn accounting
9. 9. These software can support you in your accounting
10. 10. Are you still complaining or are you already booking?

Accounting ... does a shiver run down your spine too? Admittedly, it still has a bad reputation. Maybe you've heard your colleagues complain that bookkeeping is very laborious and difficult to understand. But it doesn't have to be. Because with the right guidance, accounting can be very easy. Yes, for beginners too, not just for old hands.

In this article, you will find out what the definition of bookkeeping is, what you are booking at all and why it is so important for your company. Then you will read about what the obligation to keep books is all about and what role your accounting plays for your annual accounts. After that, you will find out what the difference between single and double-entry bookkeeping is and get a 7-step plan that will make you bookkeeping professionals in no time. Finally, we have summarised a few tips on bookkeeping for you and reveal which accounting programs and bookkeeping software can support you in your work.

1. What is the definition of bookkeeping?

The term bookkeeping comes from a time when all business transactions were still recorded by hand in a corresponding book. The accountants made sure that all bookings were entered in the correct chronological order and then sorted according to different categories, the so-called accounts. With financial accounting, you record and analyse all your company's transactions. It is therefore a detailed documentation of all business transactions. In many companies, this haptic book has already been replaced by digital accounting software, through which many processes can be automated on the computer.

2. Accounting takes into account business transactions

You record all business transactions from your company in the area of accounting. These are processes that affect your company's assets or liabilities. In practice, these are primarily payment transactions, which are often booked one after the other straight away. An example of a business transaction that you book could be your monthly salary. Your company transfers the corresponding amount to you, which reduces the account balance and the company's assets. Please note that not every activity in your company constitutes a business case.

If you, for example, order office supplies, this does not automatically affect the company's assets. Lawyers refer to this as a pending business. The seller's performance is only fulfilled when they have delivered the goods to you. This is referred to as a return service, which you also consider in your accounting. When the office materials are delivered, you book these in and then the payment to the suppliers. The receipt of the goods and the transfer of the money change the asset ratios of your company. Now the process can be viewed as a business case.

3. Accounting is important for you and your company

Even though documenting the asset-related events in your company initially sounds like a lot of work, it is indispensable for your entrepreneurial success. Based on the documented figures, you can draw conclusions about the profitability and liquidity situation of your company. Because your bookkeeping can provide you with important financial key figures and answer the following questions, for example:

• What is your income?
• What are your expenses?
• What debts does your company have?
• How much equity is there?
• What is the company's assets?

That's why it's not just interesting, but essential for the company, that you learn how accounting works.

4. For entrepreneurs, there is an obligation to keep books

Learning the basics of accounting is not only beneficial for you and your company, but also legally required if it is registered in the commercial register due to its legal form. Because §238 of the Commercial Code stipulates the obligation to keep books for entrepreneurs. This paragraph also stipulates that your accounting can be conveyed to a knowledgeable third party, such as an auditor, within a reasonable time.

This means that you must adhere to legal requirements when documenting your business transactions so that your bookings can be traced within a short period of time in the event of an audit by the tax office. In addition to the Commercial Code, the obligation to keep books also results from §§140 ff. of the Tax Code. This entrepreneurial obligation is stipulated in the tax laws, as your turnover and profit, for example, form the basis for taxation for the tax office.

5. Your accounting plays a crucial role in your annual financial statements

A central part of your bookkeeping is the so-called annual financial statements. With this, you close off your fiscal year in accounting terms. Since the annual accounts as part of the financial statements provide external parties with information about the business result of the past year and the business assets, all receipts and business transactions must be understandable and booked correctly.

Your bookings are reflected in the profit and loss account and the balance sheet, which form the minimum components of your annual financial statements. To do this, you must first close off your sub-accounts and main accounts that have existed during the past financial year. As you can see, every booking of your activities is ultimately part of a large and externally effective conclusion, which is why you should place great value on consistently and conscientiously implementing the learned basics of accounting.

‍6. Simple or double-entry bookkeeping? What's the difference?

The difference between simple and double-entry bookkeeping can be quickly explained for accounting beginners. For freelancers and small businesses, there is no obligation to keep books. All they have to do is document their income and expenses for tax purposes. The profit for the year is then determined from these figures at the end of the year and reported to the tax office. This process is known as simple bookkeeping. If your company belongs to the so-called full merchants in terms of its legal form, you are obliged to use double-entry bookkeeping.

This is the case if you belong to,

• a partnership (GbR, OHG, KG)
• a corporation (AG, GmbH, UG)
• a corporation & Co. (AG & Co. KG, GmbH & Co. KG, UG & Co. KG)
• a company with an annual turnover of more than 600,000 € or an annual profit from 60,000 €

The documentation of your payments is referred to as double-entry bookkeeping, as you make each booking on two accounts using a booking sentence: once in debit and once in credit. In addition, your annual profit is determined in two different ways. On the one hand, it results from the difference between your equity capital of the current year and that of the previous year, and on the other hand, it becomes apparent from the result of the income statement.

Tip: Even if you as a freelancer are not obliged to keep books, it makes sense to use accounting software. This can support you in the VAT return or the profit and loss account and can also send it directly to your tax advisor if they do the tax return for you.

7. Become a bookkeeping specialist in 7 steps

You already know what bookkeeping is, why it is important for your company and that most entrepreneurs have an obligation to keep books. After these basics, bookkeeping sounds very technical and laborious at first glance. “How am I supposed to learn all these components of bookkeeping?”, You might ask yourselves now. Don't worry, you can easily put your accounting knowledge into practice. The following roadmap, which will make you a real accounting professional in 7 steps, will help you with this. We will go through the rest of the process for a company that is subject to double-entry bookkeeping. This is more complicated than simple bookkeeping, but also understandable for beginners.

Step 1: Set up inventory and income accounts

When you book your business transactions, you decide which account to book them to. This is known as allocation. This also includes creating a booking record. This indicates what type of business transaction it is and on which accounts in the debit or credit is booked.

You distinguish between inventory and income accounts. The inventory accounts show the active and passive assets of your company, these include cash balances, land, fixed assets, machinery or inventory. Positive values are referred to as assets, negative values in the form of liabilities as liabilities. These form the basis for your company's annual balance sheet. You can further differentiate between active accounts and passive accounts under the inventory accounts. Active accounts represent the fixed assets. These include business and office equipment, vehicle fleet or receivables from deliveries and services. On active accounts, accesses are booked in debit and disposals in credit. Liabilities, equity or liabilities to your suppliers count among the passive accounts. On passive accounts, you book accesses in credit and disposals in debit.

This is what the accounts you need to set up for your accounting might look like.

Your income accounts provide the viewers with information about the profits and losses that result from your business activities. The revenues and income, the so-called income, are compared with the necessary expenses, the expenditure. The comparison of expenses and income shows whether your company made a profit or a loss in the current fiscal year.

Tip: Bookkeeping systems provide you with an automatic system of inventory and income accounts, so you don't have to think of your own system.

Step 2: Practice creating booking records

If you practice creating booking records, it will be easier for you to understand the effects of your account movements on the company's success. In general: Debit books to credit.

Here is an example of a booking record: You buy office furniture for 1,000 €. This is business and office equipment, which is why the amount appears in the debit. The counter-booking is made on the credit side of the cash register, because you paid for the furniture from the cash balance or transferred it via your business account. A complete booking record contains the affected accounts in addition to the amount and usually a purpose. In this example, your booking record would look like this:

Business and office equipment (debit) to cash (credit) 1,000 €, purchase of office furniture

Another example is the booking of the money receipts on your bank account when a customer pays the bill you created by transfer. Then the booking record says:

Bank (debit) to receivables from deliveries and services, 250 €, invoice number 12345

Here is another small addition: there are four different ways you can book on inventory accounts. If you know them, it will be easier for you to understand the bookings and the changes associated with them.

The four bookkeeping types are:

1. Active exchange

In an active exchange, two active accounts are affected. The amount on an active account is increased and the amount on another active account is decreased. This is the case, for example, if you deposit money from your cash holdings into your bank account. The cash account is reduced and the bank account is topped up. The associated booking record is: Bank (debit) to cash (credit).

2. Passive exchange

In a passive exchange, various passive accounts are addressed. The amount on a passive account is increased and the amount on another passive account is decreased. You have a passive exchange when, for example, you take out a loan to be able to pay your taxes. Your liabilities to the bank increase and your tax debts decrease at the same time. The associated booking record is: Tax liabilities to liabilities against banks.

3. Active-passive increase

An active-passive increase is also known as an extension of the balance sheet, as both sides of the balance sheet increase. A balance sheet extension can occur when you buy machines, but arrange a payment term with your suppliers. The active account machines as well as the passive account supplier liabilities increase. The associated booking record is: Machines to supplier liabilities.

Here you can see how an active-passive increase affects your balance sheet. The asset side is extended by the purchase of the machine and the liability side by the liabilities incurred that you do not have to pay immediately.

4. Active-passive decrease

An active-passive reduction occurs when both sides of the balance sheet decrease. That is why it is also known as a contraction of the balance sheet. An example of a contraction of the balance sheet is the return of the previously bought machines to the suppliers because they were delivered damaged. As the machines are no longer in your possession, the active account machines decrease. But now that the liabilities towards the suppliers no longer exist, your debts are also reduced on the passive side. The corresponding booking record is: Liabilities from supplies and services to machines.

As you can see, the booking records always go better by hand the more you deal with them. So: practice, practice, practice.

Step 3: Create a profit and loss account

Creating a P&L also belongs to your accounting. It is part of your annual balance sheet and shows the profits and losses of your company. To create the income statement, you use a separate P&L account. In this, you will find the expenses from your income accounts in the debit and the income and profits from your income accounts in the credit. So to speak, your income accounts are the subaccounts of the P&L.

When you close your P&L account, the result goes on into your equity account. Following this, the P&L account is really nothing more than a subaccount of your equity account. In determining profits and losses, you can differentiate between the cost of sales method and the total cost method. With the total cost method, you refer to the produced units, with the cost of sales method to the sold units.

This is what your profit and loss account can look like.

This is how you proceed to create your P&L:

• Create income and expense accounts
• Booking of business transactions such as interest income or rent fees
• Transfer to the P&L
• Determine the balance for income and expenses: Here you calculate the difference between debit and credit respectively. The balance of expenditures is then booked on the debit side of the P&L and the balance of income on the credit side.

Tip: By using a bookkeeping tool, you make it easier for yourself to create the P&L and the balance sheet. Remember that a knowledgeable third party must be able to get an overview of your company's situation at any time through your bookkeeping.

Step 4: Transfer your results to your balance sheet

After creating the profit and loss account, you can start creating the balance sheet. These two are part of your annual accounts. Your balance sheet has an active and a passive side. Under assets, you enter all assets such as receivables or cash on hand. Liabilities and capital values can be found on the liability side.

The balance sheet consists of assets and liabilities. The equity capital balances out the difference between assets and liabilities in accounting terms, so that the sum of your assets is equal to the sum of your liabilities.

The balance sheet consists of assets and liabilities. Through the equity capital, the difference between assets and liabilities is balanced out in accounting terms, so that the sum of your assets is equal to the sum of your liabilities.

When creating the balance sheet, you should also carry out an inventory, i.e., reconcile the target inventory from the books with the actual inventory from your warehouses. When preparing the balance sheet, you close all accounts on the key date and, if necessary, form provisions for liabilities that will be incurred in the foreseeable future, but the exact amount of which you do not yet know. Remember that the sum of the assets in the balance sheet is always equal to the sum of the liabilities. Since the assets usually do not add up to exactly the same amount as your liabilities, your company's equity capital balances out the resulting difference on the lower balance sheet side. If your company's assets are greater than your debts, then the equity is on the liability side. If your liabilities should be higher than your assets, which is divided into fixed and current assets, the equity is on the active side.

Step 5: Observe the GoBD

What initially sounds like a new series with addiction potential, is unfortunately just a legal stipulation. GoBD stands for “Principles for the proper management and storage of books, records and documents in electronic form as well as data access”. They also include the retention obligations for documents and receipts that you use in your accounting.

The GoBD values their

• Traceability and verifiability
• Truth, clarity and ongoing recording
• Completeness and correctness
• Timely booking and recording
• Order
• Immutability regarding the bookings and documents.

Tip: Many accounting tools are GoBD-certified. This way you can ensure that the requirements of the legislator are met.

Step 6: Choose between debit and credit taxation

If you are using double-entry bookkeeping, you are not subject to the so-called small business regulation. This means that you are obliged to charge VAT on your products or services, which you regularly transfer to the tax office. The exact moment depends on the one hand on the amount of VAT collected and on the other hand on the type of taxation you have chosen.

The amount of the VAT determines when you have to pass it on to the tax office.

In addition, if your annual turnover is less than 600,000 €, you can choose whether the tax office should apply debit or credit taxation to you.

With debit taxation, the tax liability arises at the same time as the invoice is issued. It can happen that you have to pay the taxes for an invoice that you issued, for example, on 30.06, even though the invoice might not be settled by your customers until later. Credit taxation is different. The VAT only has to be paid in the quarter in which the invoice is paid by the buyers. This type of taxation therefore takes your payment flow into account.

Step 7: Write professional invoices

Not only in the booking of your business transactions, but also when creating your invoices for your customers, you need to comply with some stipulations. You need to consider these so that both you and your customers are safe in the event of a possible check. Your invoice must contain the following mandatory information:

• Name and address of the invoice issuer, i.e. your company
• Name and address of the service recipient, i.e. your customers
• Your VAT ID if your company is a VAT-liable business
• Invoice date and a consecutive invoice number
• Time point of delivery, performance date or period of the service to be provided
• Type and quantity of the product or scope/duration of the service
• Price details: The net amount, VAT and the total gross amount must each be shown separately
• Reference to the retention obligation, if the invoice is connected with tax stipulations. This makes it easier for your customers to orientate themselves according to the GoBD deadlines.

In this sample invoice, all mandatory information is included.

Tip: In an invoice programme, you only have to make many settings once, such as the name and address of your company, your VAT ID and a note on the retention obligation. Similarly, you can pre-set different product types and services so that you only have to select them when creating your invoice. It is also possible to store the agreed prices for specific customers. This way, you can save time and concentrate on your actual tasks.

8. There are some tips to learn accounting

It's not hard for beginners to learn the basics of accounting. Because you can make this learning process easier with some tips:

• You don't have to come up with your own system for your inventory and income accounts. Accounting tools can do this for you.
• These tools also make it easier for you to create your P&L and balance sheet. In addition, many are directly GoBD-certified.
• Use appropriate software to create your invoices. This can automatically play many details after the initial setup and thus take work off your hands.
• Regularly practice the booking records in order to understand the connections and effects of your activities. So that you can always read them again, we have summarised all important booking rules for you again.

These rules make your work in accounting easier.

9. These software can support you in your accounting

As you have probably noticed, invoice programs and accounting software can take a lot of work off your hands in your accounting. Known and reliable tools include, for example:

• easybill
• Lexoffice
• GetMyInvoices.com
• Zervant
• Agicap
• sevDesk
• DATEV
• orgaMax
• Billbee
• FastBill
• Taxdoo

You can find additional accounting software tools on OMR Reviews. There you can compare more than 25 accounting software based on customer reviews. There is certainly also the right software for you and your company that meets your expectations and matches your requirements.

We also wrote the following articles:

• on the best invoice software in general,
• on the best invoice programs for small businessmen
• on the best invoice programs for craftsmen
• on the best accounting software for small businessmen
• on the best accounting software for freelancers
• on the best free accounting software

10. Are you still complaining or are you already booking?

That doesn't sound so complicated and dry anymore, does it? With a little bit of effort, anyone can learn accounting and implement it in their own company. You can take away from this article that your accounting documents the business transactions that affect your company's business success. Through it, you can see how high the income and expenditure, debts and assets of your company are. For most business people, therefore, there is an obligation to keep books.

The precise documentation of the business bookings is important because it forms the basis for the annual financial statement, which consists of the profit and loss account and the balance sheet. For companies that belong to certain legal forms, the principle of double-entry bookkeeping applies. This implies that every debit booking also requires a credit counter booking. In the 7 steps that you go through to become a bookkeeping professional, you initially set up inventory and income accounts, practice creating booking records, create a profit and loss account and subsequently transfer its results to your balance sheet.

In doing so, you observe the GoB (Principles for the proper management and retention of books, records and documents in electronic form as well as data access) and previously choose whether you want to be assessed with a debit or credit taxation at the tax office. Then you can already issue professional invoices to your customers. Accounting and invoice programs can save you a lot of work and time in all steps. You can also ensure that expert third parties can quickly get an overview of the state of your company. So, get to the computer and book, book, book – practice makes the bookkeeping master.