Introduction to Accounting in Germany
The German way of doing the accounts, can be different to what you know from back home. This page wants to give you a guide in a nutshell.
When do I best start with the accounting? I have so much work to do in setting up my business; I would love to take care of this when business quiets down during the summer.
The best time to start is before you really “going public” with your business. Assuming you are subject to VAT, you will have to submit monthly pre-returns as a start – no exception. Start a binder in which you store all your incoming and outgoing invoices. It is a good idea to further sort these invoices, for how they were paid (cash, bank transfer, credit card, etc.).
Heck, I am starting from scratch; I don’t have that much money to hire a tax consultant to do everything for me. Can’t I do anything myself and save money?
Well yes, such is imaginable. However, you will either have to do all by yourself and trust hints of business friends which might be wrong or you will have to negotiate with your consultant if he is flexible enough to match your financial abilities. In order to have good records, it is recommendable that you have your consultant set up the accounts for you, give you an initial training of how to book with the system and then at the end of the year, only have him check everything. The initial training and set-up as well as the controlling at the end of the year should each last about an hour. If your consultant insists doing everything himself, look for another one.
N.B. This is only true for freelancers or smaller businesses. The bigger your business will be from the start, the more services of the tax consultant you ought to hire.
Do I have to use an accounting program?
No law will demand that you do so. It is legal to use just a spreadsheet. However, this is only true for freelancers! Corporations must have orderly bookkeeping from the first day.
What documents do I have to keep? I get so much advertising mail every day, but I guess according to the German bureaucracy, I am supposed to keep this too.
This is simple to answer. You have to keep everything that is seriously related to any income or expense! So advertisement, offers and the like can be gladly dumped as recycling paper. It is generally permissible to store all such receipts digitally on your hard disk drive. When doing so, do make sure that these documents can be opened easily. Best would be to use standard formats like .TIFF and .PDF. It is your responsibility to maintain the legibility. The key to professional accounting is solid and complete documentation, especially original receipts, inter-company invoices and proper inter-company agreements for all transactions. When hiring employees, you have to keep precise records on how and how much you have paid (cash vs. things). In German such payroll journal is called “Lohnjournal”.
Can I pay my employees in cash? You know, my business is so much cash driven that it would save a lot of effort trying to always visit the bank to transfer the salaries on time.
Generally, it is up to you when and how you pay your employees. However, it is customary to pay the staff on one of the last days before the month ends by transfer to their bank account. Bank payments have the advantage of having proof of the payment. If paying cash then make triple sure that you have exact receipts of the payments! “Exact” hints in this relation to the wording on the receipt. For tax law, it is sufficient when it reads "salary for John Doe" but not for civil law.
The written receipt should show all important details:
- recipient’s full name,
- reason for payment (e.g. “salary January 2021”),
- date of payment,
- recipient’s signature.
Grand! That is already a great relief that I can pay employees in cash. What about the authorities? Do they accept cash payments?
Sorry, neither tax offices nor health insurances accept cash payments! If you insist on cash payments, you will have to go to one of their banks and pay directly into their account. Expect that you will be “fined”, um, “charged” for this extra work. And yes, this will be a deductible. However, get a bank account! It saves a whole lot of hassle!
Do I have to use a German bank account or can it be my home bank?
The accounts of these authorities are widely open for any incoming monies. It is legally irrelevant if the account is in Germany or abroad. The only practical downs are: It takes longer for the money to reach the German account. The authorities must receive payment in Euro – even if that is not the currency of your account. Inside the SEPA system, it is only a matter of a few days to make a payment inside this system.
Any language hints? I mean, can’t I just add as reference “income tax”.
The language of German authorities is German. Period. The bookkeeping assistants at the relevant authorities are not typically trained to deal in other languages. Besides, you also carry the responsibility that your transfer is understood. Be as precise as possible! Don’t just write “income tax John Doe” as paying the wage tax for your employee John Doe. Correct would be: “Lohnsteuer Februar John Doe”. If they need “ages” to book your payment to your account, this is your problem. Fines and default interest will typically be fined if you pay late.