Double-entry bookkeeping in Germany: An accounting guide for founders

Contents

• Definition
• Who is required to use it?
• Account types
• Closing accounts
• Chart of accounts
• Account records
• Annual accounts
• Balance sheet
• Conclusion

What exactly is double-entry bookkeeping?

As the name suggests, double-entry method of bookkeeping 💬doppelte Buchführung involves entering each business transaction into two different accounts. Double-entry bookkeeping involves significantly more effort than single-entry bookkeeping, but it also provides more transparency, as discrepancies are much more noticeable.

Each transaction is recorded in the debit side of one account and the credit side of the other, both entries having the same value. This is also the case when funds are transferred within the company. If money is withdrawn from a checking account and deposited into a cash register, that transaction must be recorded. Generally, every transaction is dealt with as an asset (‘Do I have liquidity?’) and as an item of profit determination (‘Am I acting profitably?’). In the account system, assets are depicted with asset accounts 💬Bestandskonten, and profit determination is portrayed by profit accounts 💬Erfolgskonten.

The term ‘double entry bookkeeping’ also hints at the two ways of representing company success: a balance sheet 💬Bilanz and a profit and loss statement 💬Gewinn- und Verlustrechnung, or GuV).

Who is obligated to use double-entry bookkeeping?

All corporations (GmbH, UG, AG, etc.), registered merchants (e. K.) and commercial partnerships (oHG, KG, GmbH & Co. KG, etc.) must use double-entry bookkeeping and prepare a annual financial statement 💬Jahresabschluss.

You can find more information about accounting for various legal company forms here:

• Bookkeeping for a UG 
• Bookkeeping for a GmbH

This accounting obligation 💬Buchführungspflicht also applies to sole proprietorships, farmers and foresters that exceed certain profit and/or revenue limits. For farmers and foresters, the value of the land they cultivate also plays a decisive role.

Partnerships (such as GbR or PartG), liberal professionals, sole proprietorships, foresters or farmers that do not exceed the limits mentioned above are exempted. Instead of having to use the double entry method of bookkeeping, they can simply prepare an EÜR—a simplified cash basis accounting at the end of their financial year.

Types of accounts

In general, there are two main types of accounts in the double entry account system: Asset accounts and profit accounts.

Asset accounts

Asset accounts are derived from a company’s balance sheet, where every item is entered into an account. Entries are regularly made into both the debit and credit sides, as balances continually fluctuate.

Asset accounts always begin with the opening balance values that resulted from the previous year. One example  is a cash register. When goods are sold, cash is deposited into the register. Cash is also withdrawn, however, when profits are taken to the bank at the end of the week. There is also a certain amount of cash in the register at the start of the year – the register’s opening balance.

Asset account balances form the basis of the balance sheet as part of the year-end financial statement. The profit account balances, on the other hand, form the basis of the profit and loss statement.

An example

You need change for the cash register 💬Kasse, so you withdraw €500 from your business’s checking account and deposit it into the cash register. You then enter €500 into the credit side of the current account 💬Girokonto, and €500 into the debit side of the cash register. In the end, the account entries should look something like this:

Profit accounts

All profits and losses are entered into profit accounts. These accounts record all revenues and expenses over the course of an accounting period. Profit accounts are equity subaccounts and are divided into two types:

Expense accounts

Transactions are only entered into the debit side (with the exception of adjustment postings) of expense accounts. Some examples of expense accounts include wages and salaries, depreciation, advertising or expenses for raw materials, auxiliary materials and operating materials.

Revenue accounts

When it comes to revenue accounts, transactions are entered into the credit side (with the exception of adjustment postings). The revenues recorded can result from service provision, interest income or rental income, for example.

At the end of the year, the balances of all profit accounts are recorded in the profit and loss statement. At the beginning of each year, all profit and loss accounts begin with a balance of zero.

In many cases, an account is opened for each shareholder, recording all assets and liabilities that apply to that shareholder. Depending on the company’s business activities, it is not uncommon for a company to use dozens or even hundreds of accounts.

Double entry bookkeeping: Closing an account

At the end of each year, accounts are closed in order to prepare for the balance sheet. When closed, both sides of each account must show the same amount under the bottom line. For that reason, the closing balance 💬Endbestand, or EB is always entered on the side with the lower amount. Below is what such a closing could look like:

Closing an account makes it easy to see how the balance of a given account has changed. The most decisive information here comes from the amount and position of the closing balance. In the simplified example, it is obvious that the checking account lost €500, and the cash register gained €500. In practice, of course, the accounts contain considerably more entries and have an opening balance (which is the closing balance of the previous year) – but that doesn’t change the validity of this example.

The chart of accounts

A company’s chart of accounts 💬Kontenplan lists all accounts that a company uses to record transactions. The chart is often divided into account classes. It contains a logical, comprehensible structure in which individual accounts are given at least one account number as well as a text explanation. Normally, additional information relevant to the account is also provided.

There are standard charts of accounts that you can take advantage of, such as the Standardkontenrahmen 04 or SKR04 for short used in Germany, but these are usually kept very general in scope.

It is often easier to create a customised chart with a structure that is tailored to your company. The freedom involved in creating a unique structure and deciding which account designations to use allows a specific account to be found in a different place and under a different number in virtually any chart of accounts.

With standard charts of accounts, such as SKR04, every account consists of four digits, or capital letters followed by digits when necessary. It usually follows this logic:

• Letter(s): Account function
• 1st digit: Account class
• 2nd digit: Account group
• 3rd and 4th digit: Account type within the account group

Account records: The basics

Every time an entry is posted, it must be recorded in a journal with an account record list with the following information:

• Entry date
• Reason for entry
• Debit to credit accounting record
• Entered amount

Accounting records can be a stumbling block for many entrepreneurs, as the process is not necessarily intuitive. ‘Cash register to bank’, for example, does not imply that money is flowing from the cash register into a checking account—the opposite is true.

Four-digit numbers or abbreviations are often used to designate the accounts, and the ‘to’ is often replaced with a colon. The standard for this process in Germany is the DATEV chart of accounts.

Posting record example: Cash register €500 to Bank €500

According to DATEV: F 1600 : F 1800 €500

Adjustment postings

Erroneous entries may occur when an order is cancelled or when the amount is changed. Even if renegotiations happen after the fact, for example, entries that have already been posted cannot be changed. The law specifies that businesses are to abide by the standard accounting principles by making an adjustment posting. The corrective entry is made parallel to the actual entry and posted with the appropriate designation.

In Germany, the following abbreviations are usually used as designations when making adjustment postings:

• ‘Korr’ (for corrections)
• ‘Storn’ (for cancellations)
• ‘Berichti’ (for rectifications)
• ‘Aufl’ (for resolutions)
• ‘Rückn’ (for retractions)

VAT and input tax entries

Every transaction that is subject to value-added tax always consists of three entries. Two can be found in both relevant accounts, and the third in a tax account. For company revenues, an entry is made into the input tax accounts. For expenses, an entry is made into the VAT account.

For example: Mr. Wagner purchases printing paper for his business with the business’s checking account, paying €100 (net) plus 19% VAT for a total of €119. The following entries must be made:

Office supplies €100 to expenses €100
VAT 19%  €19 to Bank €119

Entry according to DATEV-Kontenrahmen (SKR 4):

6815 100 €  :  F 1800 119 €
2600 19 €

Accounting software can simplify this process significantly. Most software automatically makes entries into the VAT and input tax accounts and ultimately into the VAT clearing account. The closing balance then reveals how much money must be paid to the tax office.

Annual accounting

The balance sheet and profit and loss statement make up the annual financial statement or annual accounts. Read more about the German equivalent of the end of annual financial statement here.

The balance sheet

A balance sheet lists and clearly presents the end balances of all asset accounts. Balance sheets are divided into two sides: assets and liabilities (or asset accounts and liability accounts). In German, the two sides are referred to as the Aktiva and the Passiva.

Assets

Fixed assets 💬Anlagevermögen include assets for the company’s long-term use that are not easily converted into cash, such as land, buildings, company cards or large machines.

Current assets 💬Umlaufvermögen include cash (checking account and cash register balances) and other assets that can be quickly converted into cash, such as stored materials and stock.

Liabilities

Equity 💬Eigenkapital includes all capital that is available to the company without interest or time limits

Borrowed capital 💬Fremdkapital includes all of the business’s debts, such as bank loans and other liabilities. Borrowed capital usually bears interest.

Balance

The balance determined by closing the profit and loss accounts is posted to the balance sheet as an accounting record. If the year-end result is favourable, the profit is added to the equity account. If not, the amount is either recorded on the asset side or as a negative amount directly underneath equity.