Preliminary Accounting: Explanation, Tasks & Implementation

1. What is preparatory accounting?
2. What does preparatory accounting cover and what does it not?
3. Who needs to do the preparatory bookkeeping?
4. Why does preparatory bookkeeping need to be done?
5. What tasks are behind preparatory bookkeeping and what steps are necessary for preparatory bookkeeping?
6. What deadlines are there in preparatory bookkeeping?
7. What software can be used to implement preparatory accounting?
8. Conclusion

It's nearing the end of the month. The orders are flowing, project management is in place, sales has put in a strong month. It seems to be peaceful, these days, shortly before the start of a new month. Time to close the laptop for a while, take care of the family, switch off and regenerate. Yet, there's something lurking in the mantle of tranquility. An object that few can express loudly. It's like a fate permeating everything.

Suddenly, the phone rings. It's the call from the tax consultant, who finally wants the receipts for incoming and outgoing invoices already requested for the fourth time. Even worse - there are receipts involved that were 'forgotten' 2 or 3 months ago. We both know they were not forgotten …

In an unguarded moment, you may not have requested the receipts at all, because after the fifth glass of wine, you had to 'prioritize' the matters of the day. Do you want to admit saying, 'Hey, I just forgot?' - or rather 'Hey, I unfortunately 'lost' the receipt?

Let's get to the main point and the content of this article. It's about a seemingly dark chapter of entrepreneurship. It's about preparatory accounting. Our guest author Steffen Milsch gives you an insight.

What is preparatory accounting?

Order is half the life. That's how they say it, don't they? Back in my day, tax consultants had a term for clients who ranked very high on the popularity scale. They were the so-called 'shoebox clients'. They'd come to the law firm with a shoebox - best of all 30 days before the deadline for all declarations / annual financial statements / disclosures or the like and proudly brought their receipts in a fully stuffed box around the corner and put it on the tax consultant's desk. This happens less and less today.

Preparatory accounting ensures order in your professional finances. It helps tax consultants make sensible monthly reports and accurately hand over corresponding VAT declarations. The preparatory accounting submits structured receipts to the tax consultants (incoming and outgoing receipts) and pre-counts them a bit. This is because tax consultants are obliged to duly appreciate the business facts and circumstances for tax purposes.

The great advantages of preparatory accounting are obvious. The tax consultants can correctly assess your business matters. This might sound trivial, but it can lead to tax pitfalls if not correctly transferred. This significantly minimizes the risk of unpleasant surprises from the state.

From a controlling perspective, preparatory bookkeeping is a dream. In most cases, the tax consultants have applied for a permanent extension at the tax office, so they are always 2 months late in accounting. So that you're always 'up-to-date', you can run reasonable analysis using an appropriate software and check where your biggest cost positions are and which customers have generated which profits in the total period. Here, you can make business decisions, which are not made from the gut, but are data-based.

It would be interesting for you to know in which period which expenditure was incurred. Ideally, the expenditure is categorised into different sub-items such as tool costs / travel expenses / office supplies or salaries etc. The development of these costs can be precisely tracked at receipt level and essential decisions and forecasts can be made from it. We always refer to the following condition as the receipt level: If the development in total numbers is displayed (for example €290,000 spent on office supplies in the year), this can lead to disbelief and may need to be tracked in detail later. Then you can go down to the detailed level of the receipts and display the highest expenditure positions.

What does preparatory accounting cover and what does it not?

Preparatory accounting essentially consists only in the proper provision of receipts for the tax consultants. This is usually done in such a way that the tax consultants must also be able to reasonably assess business matters. This also includes the proper (§ 14 UStG) preparation of invoices for customers and the provision of these, depending on the choice of accounting (balance after performance date / EÜR-computer after receipt of money from customers). The provision of all incoming invoices also in accordance with the above-mentioned balance sheet principle is a prerequisite for your preparatory accounting.

The preparation of wages and salaries as part of payroll accounting does NOT belong to preparatory bookkeeping. Controlling also does not belong to it, even though preparatory bookkeeping can lay the foundation for it. The preparation of monthly and/or annual financial statements and VAT declarations are the responsibility of the tax consultants and thus also do NOT belong to it.

Who needs to do the preparatory bookkeeping?

Self and always are they, the classic self-employed. Do you start fresh in entrepreneurship, then the obligation is yours personally. This has massive advantages. If you know what's going off your bank account or coming onto it, it's a major lever to maintain control in the company. You grow and get bigger, sometimes it's quite clever to hand over simple tasks, creating and uploading invoices, to a working student. This saves you a lot of time and allows you to spend time analysing your income and spending. If the company becomes quite large, a finance department can also operate the program (see below) and access all the raw data for controlling from one data source.

As an entrepreneur, it's always advisable to dive into micromanagement now and then and to follow operational activities in finance for a few hours. Because you certainly know the saying: 'The best captain of a ship must have rowed himself at times.'

Why does preparatory bookkeeping need to be done?

A tax consultant must be regarded as a team member who also depends on your cooperation. After all, the tax consultants can only do their job really well if they actually have all the raw data at hand and can properly judge your company's business matters in terms of trade and tax law. This can result in opportunities for tax optimizations, as well as risks of not having paid contributions. Think about the artist's social fund, which can strike quite easily if invoices are not properly assessed. Also think about profit tax matters from entertaining expenses to company celebrations. The entrepreneur does not always have an eye for this - but the tax consultants should definitely have. Every now and then, strange objects are purchased by your team. (Here's a small example from professional practice):

Example of purchased objects in the company

This situation must be properly assessed. In terms of commercial law, it is important to judge whether the object purchased has taken a significant share of the company's management. For example, this is usually used for material to manufacture objects for further sale. The hospitality industry is even more complex, as the degree of decision as to whether the object has played a crucial role in the product creation is a narrow line. Let's take, for example, a service industry like the social media craft. The engagement of an influencer can be for the business itself or for a customer who has commissioned a social media service from the business. Both have different effects on the business transaction. The example mentioned in the picture is a cooking show that was organised for a customer. Thus, the purchased item is also booked exactly according to these special product-specific account categories by the tax consultants.

What tasks are behind preparatory bookkeeping and what steps are necessary for preparatory bookkeeping?

From marketing we know, there are always different packages offered, from which you can choose. I would also divide this into three different categories. The first category being the absolute basics. Categories 2 + 3 then become much more interesting for already established entrepreneurs.

Basic-package (compulsory)

Your bookkeeping is usually restricted to just two things. Incoming invoices and outgoing invoices. And that's exactly what this is about. Every incoming invoice you receive (for example from a supplier) must be scanned and stored somewhere for audit-proofing. The tax consultants usually take care of the revision-proof storage via DATEV and via. The same applies for the outgoing invoices you write. Outgoing invoices are invoices that you write to your customers so that ideally your bank account is filled. These invoices must also be stored properly and sent to the tax consultants. For the older semester, it should be said: Yes, you can also pack the receipts into Leitz folders, staggered by months and type of invoice. But please don't do that and take a look at this article about the principles of proper bookkeeping for this purpose.

The transmission of preparatory bookkeeping is either done once a month or you do it once a day. There are fantastic tools for just this kind of transmission process to be carried out sensibly and orderly. This prevents, for example, that the tax consultants call you and constantly ask for receipts two or three times. They can lose the overview too. As part of the tools, there are excellent interfaces, where the data can be structured and transferred once a month.

I once set up a mail mailbox via Datev-Company Online and forwarded my receipts to the mail. Possible and practical - but only up to a certain company size - then it becomes unclear.

Now all that's left to say is congratulations - you've mastered the first level of preparatory accounting. If you're ready to dive even deeper and feel the great benefits of the advanced package - stay with it now.

Advanced-package

You've mastered the first steps and the absolute basics, but you don't just want to make your tax consultants happy, but you also want to get something out of your hard work, which you ideally handle continuously during your day-to-day business? I have an idea and will explain it with the tool I work with. Since the tools for the preparatory Accounting all work technologically the same, this is just a presentation. If you're not quite sure yet which tool might be the right one for you, then check out the article about the seven best accounting software systems in comparison .

First, you update your bank account every morning. This usually has to be done manually.

Bank account update

This is relatively easy via the update button. You can see now, I have not yet assigned the turnover! This is not acceptable and needs to be corrected immediately. For this, I click on the 'not assigned' button.

Assign turnover

You see now the classic Facebook receipt. You can easily pull this from the Facebook ad manager. Once you have the PDF - that's first of all quite great. Click directly on 'capture new receipt and assign'.

If you do not have a receipt for expenses such as insurance payments (social security, employees etc.) or salaries, you can also categorise these above under 'categorise without receipt'. This will give you a lot of insights in the Professional package.

Record receipt

Upload the receipt here and choose a supplier. In this case, the supplier would be Facebook. The cool thing about Lexoffice is the OCR recognition. That means - Lexoffice reads out the PDF receipt and already fills in everything that is on the receipt.

The type of expense is important, because here you can already do a small pre-accounting. You transmit the data to the tax consultants. In an optimal case, you have already given them the booking suggestions and they can simply check whether the facts you have already appreciated are correct and make adjustments.

If you have created a supplier and have an expense (like Facebook) that's advertising costs - we all agree on that. If I have this expense more often and choose the supplier - Lexoffice pre-books your receipt automatically!

Now you might be wondering: How can the tax consultants see this at all - and how is it transmitted here?

In most programs, you can invite your tax consultants. They can link the account with Datev-Company online. Look forward to no annoying return enquiries - which in any case always appear at the worst of all moments, while you are already submerged in the operational day-to-day business.

The outgoing receipts are easily written via the program Lexoffice and automatically assigned when a payment is received. If this is not possible, you may need to help a bit and assign manually. But that's not many receipts from my experience.

Professional-package

All receipts assigned? All income and expenditures correctly recorded? Receipts that did not flow to or from the bank account already stored and pre-booked? Brilliant!

You can now see on a daily basis how your income-surplus account / P&L account and cash flow are developing. And that's just with one click of a mouse and allows you to precisely check where all your money is going. It's sometimes magical how quickly commercial decisions are possible. It answers questions like: which customer owes you what money. How high are your open and overdue claims? Especially for liquidity management, it is of great importance to keep these aspects in mind and in sight at the very beginning. The program must also allow you to start a corresponding dunning process. Because if you come to the realisation that many of your customers are delinquent, a problem solution must be found. In Lexoffice, this is quite easy:

Overview of invoices

You can also start to implement the cost centre system to look at your actual margin of the products you have sold. Please make sure that you think about a solid structure for this beforehand and then only get started.

In theory, payroll accounting is also possible in some programs. Personally, I recommend doing this via a payroll office. These have become so cheap - it's not worth doing it yourself. With the help, you can relatively easily see which bottlenecks are emerging in your company - where more capacity is needed or where too much capacity is available. You can also make basic calculations on customer dependencies and your profit margin. It's crazy. The deeper you dive, the greater the insights are.

Your next step is to take over the accounting completely! 1+ → With a star!

What deadlines are there in preparatory bookkeeping?

Do it continuously. Best once a week. If you think, 'not much has come this week'. Do it anyway. This becomes quite a lot, if you suffer from procrastination! I am a burned child myself.

If all else fails …

By the 30th of each month, all receipts should have been properly handed over. Even with a permanent extension! By the 10th of each month, the VAT registration must be made so that the tax office does not climb on your roof.

Last deadline is therefore the 10th of the following month and best of all, a fruit basket for your tax consultants!

What software can be used to implement preparatory accounting?

There are numerous software solutions for this topic. Definitely take a look at the Software-Guide by OMR Reviews, on the topic of invoicing programs we created. The best programs for this currently are, in my opinion, Lexware Office and sevdesk! 

What does preparatory accounting cost?

The programs have different prices. But they should not cost more than €30 a month, as then they are quite overpriced according to market average. A really good program with a lot of features is available for around €20 a month.

Conclusion

It is always a matter of valuation how you want to look at such programs. Most people do not discover the charm of preparatory accounting, because they cannot recognize the benefit. Because let's be honest. A tax consultant will cost less and less nerves if they are provided with sensible data. Entrepreneurs will be more relaxed and save time, which they can invest in their projects. The most important factor - you will recognize where your financial bottlenecks are and how you can sensibly combat them. Not to mention concerns about potential company audits / VAT checks / cash checks or similar financial administration. You will learn finance nowhere better than in your own company and best of all through such aids!

On that note: Keep going and keep up the good work!