This guide provides you with a complete overview of the basics of double entry bookkeeping (doppelte Buchführung), including explanations of essential processes, account systems, account classes, stock and profit and loss accounts, and much more.
What exactly is double entry bookkeeping (doppelte Buchführung)?
As the name suggests, the double entry method of bookkeeping 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 If money is withdrawn from a checking account and deposited into a cash register, that transaction must be recorded. In general, 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 stock accounts (Bestandskonten), and profit determination is portrayed by so-called profit and loss 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*).
*Sorry, this article is only offered in German.
Who is obligated to use the double entry method of bookkeeping?
All corporations (GmbHs, UGs, AGs, etc.), registered merchants (eingetragene Kaufleute, or e. K.) and commercial partnerships (oHGs, KGs, GmbH & Co. KGs, etc.) must use double entry bookkeeping and prepare a Jahresabschluss (a company’s annual accounts, a type of year-end financial statement).
You can find more information about accounting for various legal company forms here:
*Sorry, these articles are only offered in German.
This obligation (known as Buchführungspflicht in German) 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.
The Buchführungspflicht does not apply to partnerships (such as GbRs or PartGs), freelancers, sole proprietorships, foresters or farmers that do not exceed the limits mentioned above. Instead of having to use the double entry method of bookkeeping, they can simply prepare an Einnahmenüberschussrechnung (EÜR) at the end of their financial year.
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Types of accounts: Stock accounts and profit and loss accounts
In general, there are two main types of accounts in the double entry account system: stock accounts and profit and loss accounts.
Stock accounts (Bestandskonten)
Stock accounts are derived from a company’s balance sheet, where every item is entered into an account.
With stock accounts, entries are regularly made into both the debit and credit sides, as balances continually fluctuate. Stock accounts always begin with the opening balance values that resulted from the previous year. One example of a stock account 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.
Stock account balances form the basis of the balance sheet as part of the year-end financial statement. The profit and loss account balances, on the other hand, form the basis of the profit and loss statement.
Stock account entries: An example
You need change for the cash register, 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 Girokonto (checking/current account), and €500 into the debit side of the Kasse (cash register). In the end, the account entries should look something like this:
Giroakonto = checking/current account
Kasse = Cash register
Soll = Debit
Haben = Credit
Profit and loss accounts: Expense and revenue accounts (Aufwands- and Ertragskonten)
All profits and losses are entered into profit and loss accounts. These accounts record all revenues and expenses over the course of an accounting period. Profit and loss accounts are equity subaccounts and are divided into two types:
Expense accounts (Aufwandskonten)
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 (Ertragskonten)
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 and loss 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, EB) is always entered on the side with the lower amount. Below is what such a closing could look like:
Giroakonto = Checking/current account
Kasse = Cash register
Soll = Debit
Haben = Credit
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.
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Double entry bookkeeping: The chart of accounts (der Kontenplan)
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’ (SKR04) 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.
Letter(s): Account function
Digit: Account class
(Ziffer: Kontenklasse )
Digit: Account group
3rd and 4th digit: Account type within the account group
(3. und 4. Ziffer: Kontenarten innerhalb der Kontengruppe)
Example for an account number in the SKR04 chart:
In the SKR04 chart of accounts, the account ‘Sales deductions for tax-exempt revenues without input tax deductions’ (‘Erlösschmälerungen für sonstige steuerfreie Umsätze ohne Vorsteuerabzug’) is given the number AM 4703. The following bits of information can be derived from this number:
Account function (Kontenfunktion): AM (automatische Errechnung der Umsatzsteuer, or automatic VAT calculation)
Account class (Kontenklasse): 4 (Umsatzerlöse, or sales/revenues)
Kontengruppe: 7 (Erlösschmälerungen)
Account type (Kontenart): 03 (sales deductions for tax-exempt revenues without input tax deductions)
Rechnungswesen: Accounting in Germany
Account records (Buchungssatz): 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
(Datum der Buchung)
- Reason for entry
(Begründung der Buchung)
- Debit to credit accounting record
(Buchungssatz Soll an Haben)
- 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. To the left of the ‘to’ (German: ‘an’) in ‘debit to credit’ (Soll an Haben) is the account in which an entry is made into the debit side. 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- Kontenrahmen.
Posting record example:
Cash register €500 to Bank €500
(Kasse 500 € an Bank 500 €)
According to DATEV:
F 1600 : F 1800 500,00 €
Adjustment postings (Korrekturbuchungen)
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 Korrektur/correction)
- ‘Storn’ (for Stornierung/cancellation)
- ‘Berichti’ (for Berichtigung/rectification)
- ‘Aufl’ (for Auflösung/resolution)
- ‘Rückn’ (for Rücknahme/retraction)
VAT and input tax entries (Buchung der Umsatzsteuer und Vorsteuer)
Every transaction that is subject to VAT 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. Founder 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 expenses €100
(Aufwand Bürobedarf 100€)
VAT %19 €19 to Bank €119
(VST 19 % 19€ an 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.
Double entry bookkeeping and the annual accounts (Jahresabschluss)
Every merchant who is obligated to use the double entry method of bookkeeping must prepare a balance sheet when taking up business activities or at the end of the financial year. A profit and loss statement (GuV, or Gewinn- und Verlustrechnung) must also be prepared. Together, the balance sheet and GuV/profit and loss statement make up the annual accounts (year-end financial statement), or Jahresabschluss in German. Read more about the German equivalent of the end of financial year statement here.
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Double entry bookkeeping: The balance sheet (Die Bilanz)
A balance sheet lists and clearly presents the end balances of all stock accounts. Like stock 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 = Activa
Fixed assets = Anlagevermögen
Current assets = Umlaufvermögen
Liabilities = Passiva
Equity = Eigenkapital
Borrowed capital = Fremdkapital
Assets: What are fixed assets and current 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. Learn all about fixed asset accounting here (in German, sorry).
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: What are equity and borrowed capital?
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 sheets: Profit and loss
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.
The moral of the story
The double entry method of bookkeeping is risky and incredibly time-consuming for untrained entrepreneurs, even with the right accounting software. Mistakes can often be penalised with very large fines. Alternatively, you can leave your company’s accounting to a professional who knows what they are doing and avoid so much stress (yes, this is a plug for our services).
Note: Opening your books is a key step in starting a company in Germany. That’s why it’s part of our company formation checklist.
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