When you fill in the tax registration form you will have to choose between two methods to determine your profit: Single entry or double entry bookkeeping. This tax guide will explain what is the difference between the two.
What is bookkeeping?
In its simplest form bookkeeping is a list in which all income and expenses of a business are listed. As soon as you register as a sole-trade or freelancer you are obliged to record your income and expenses.
What is double entry bookkeeping?
Double bookkeeping is also known as balance sheet bookkeeping (Betriebsvermögensvergleich) and is more complex than single entry bookkeeping.
The double bookkeeping method refers to a bookkeeping system in which your business income and expenses are recorded twice:
- Where the transaction took place (e.g. using a bank account statement)
- What the transaction was for (e.g. using an income invoice with your provided services or an expenses invoice for office supplies )
Here is an example: Your client pays your invoice for web design services by bank transfer. In this case you have to record the payment on one side (here bank account) and on the other side what it was for (here debts from revenue).
What is single entry bookkeeping?
Single bookkeeping is also known as net income method (Einnahme-Überschuss-Rechnung). Single bookkeeping is used for small businesses with manageable business processes.
In single bookkeeping all income and expenses are recorded sorted by date. This means that you simply record for what you have received or spent money.
Here is an example: Your client pays your invoice for web design services by bank transfer. In this case you only have to record what it was for (here revenue).
How do I know what to choose?
Single entry bookkeeping is definitely simpler to learn and easier to use.
Usually beginners decide upon this option.
As single entry bookkeeping doesn't require you to keep track of your bank statements, it is recommended to check your bank accounts regularly to spot some missing business income or expenses.
Keep in mind that freelancers can always opt for single entry bookkeeping, whereas sole-traders can only opt for single entry bookkeeping if their turnover was less than 600'000€ per year or their profit was less than 60'000€ per year.
Sorted tax guides are provided without liability and do not replace a tax advisor.
To get an accurate answer for your specific case, please consult a tax advisor.
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