Accounting explained: Important terms for entrepreneurs

Accounting, often referred to as the “language of business,” is at the heart of every company. It provides essential information about the financial position, performance and development of your company. For entrepreneurs who want to focus on their core business, it may often seem complex. But with the right understanding of the basic accounting concepts, it becomes a powerful tool for well-founded decisions.

This article explains the key accounting concepts in simple language so that you, as an entrepreneur, can keep track and navigate successfully.

Accounting basics explained: What is important?

Accounting primarily serves two purposes: external accounting (information for tax authorities, investors, banks) and internal accounting (basis for corporate management).

1. The inventory and balance sheet

The starting point is inventory (physical inventory) and inventory (written list of all assets and liabilities).

* Assets (assets): Shows how the funds were used (fixed assets such as machinery, current assets such as cash balance and receivables).

* Liabilities (capital): Shows where the funds come from (equity, debt capital such as loans and liabilities).

* The balance sheet: It is a comparison of assets and liabilities based on the reporting date. It follows the principle: Assets = Liabilities.

Also read: The most common accounting mistakes and how to avoid them

2. Duplicate bookkeeping (double)

In Germany, double bookkeeping is mandatory for most entrepreneurs. It is the core of modern accounting and is based on the principle that every business transaction involves two accounts:

• Should: The left side of the account (usually the recipient or the value usage).
• Have: The right side of the account (usually the giver or the value creation).

Each booking record is based on the scheme: Debit to have.

Example: You buy office supplies for €100 in cash.

Booking: Office supplies (expense account) at cash (inventory account) 100€.

Each booking record is based on the scheme: Debit to credit. In order to master the basics of double, it is helpful to familiarize yourself with accounting for self-employed people.

3. Chart of accounts and chart of accounts

In order to ensure systematic recording, accounting uses standardized directories:

• Chart of accounts: A higher-level, cross-industry structure (e.g. SKR 03 or SKR 04).
• Chart of accounts: The individual selection and numbering of the accounts actually used in the company, based on the chart of accounts.
  Also read: 10 tips on how to organize your bookkeeping efficiently and save taxes

Profit calculation and transactions

The second main function of accounting is to determine the company's success over a specific period of time.

1. The profit and loss statement (income statement)

The income statement (also known as income statement) shows how the profit or loss for the financial year was generated. It is a comparison of income and expenses.

• Income: All increases in the company's value (e.g. sales revenue).
• Expenses: All value consumption of the company (e.g. wage costs, rent, use of materials).

Result: Income — Expenses = Profit/Loss.
Also read: Why professional accounting helps your business move forward

2. Important account types

P&L accounts (income and expense accounts) are so-called income accounts, as their balances directly influence profit. On the other hand, there are inventory accounts (balance sheet accounts), which represent assets and capital.

3. Depreciation (depreciation)

Depreciation for wear and tear (AfA) are a central concept. They record the depreciation of fixed assets (e.g. machines, vehicles) over their normal useful life.

• Example: A PC for 1,000€ with a useful life of 5 years is depreciated by 200€ annually. This is an expense that reduces profit without money currently flowing out.
• Also read: If you are unsure which tools will make your job easier, here is a comparison of accounting software.
  

4. Sales tax (VAT) and input tax (VSt)

For entrepreneurs subject to accounting obligations, these are key terms:

• Sales tax: The tax that you must charge your customers for deliveries and services and pay to the tax office (also known as value added tax).
• Input tax: The tax that other companies charge you for their deliveries and services and that you can have the tax office reimburse you (also known as input tax deduction).

The monthly/quarterly advance return for sales tax is the difference between sales tax collected and input tax paid.

🗓️ Organization and deadlines

Proper bookkeeping requires compliance with legal obligations. Use the power of digitization and automation to optimize processes in your company and save time.

1. Principles of Proper Accounting (GoB)

The GoB are unwritten rules for bookkeeping. They ensure that the accounting is comprehensible and accurate for third parties (tax authorities, banks). Key principles include:

* Document principle: No booking without a receipt! Each business transaction must be proven by a document.

* Clarity and clarity: Bookings must be comprehensible and systematically organized.

* Completion: All business transactions must be recorded.

2. Retention requirements

Companies must keep receipts and books for long periods of time. Anyone who manages their documents digitally should also digitally optimize office management in order to bring structure to everyday business life.

* 10 years: Accounting documents, books, inventories, annual financial statements, commercial and business letters.

3. The financial statements

At the end of the financial year, prepare the annual financial statements, which usually consist of the balance sheet and the income statement. Corporations must also publish it with the commercial register.

Your next step: professional support

The complexity of accounting can be a significant burden, particularly during the start-up and growth phase. From the correct account assignment to compliance with deadlines to the preparation of legally compliant annual financial statements — mistakes can be expensive.

🚀 time for Klarkwerk!

Would you like to focus fully on growing your business without being distracted by accounting obligations? Are you looking for a partner who not only manages your figures but also actively uses them for your company's success?

Take today contact with the klarkwerk agency on! We offer you tailor-made solutions for your financial accounting, payroll and financial statements. With klarkwerk, you gain clarity, security and time for your core business.

Frequently asked questions (FAQ) about accounting

Q: What is the difference between income surplus statement (EUR) and accounting?

A: The EUR is a simplified form of profit calculation for smaller companies. Here, income and expenditure are simply compared. Accounting (double) is mandatory for larger companies and requires a balance sheet and a P&L, which provides a deeper insight into assets and liabilities.

Q: Do I need to do bookkeeping as a small business owner?

A: Yes, even small business owners must document their business transactions. However, they are exempt from sales tax (no ID, no input tax deduction) and usually only have to create a simple EUR.

Q: What is “accrual accrual”?

A: This principle of accounting means that expenses and income are attributed to the period in which they arose economically, regardless of when the money was flowing. This is done using accrual items (RAP) on the balance sheet.

conclusion

Bookkeeping is much more than a chore. It is the financial early warning system and the success mirror of your company. A solid understanding of the accounting terms explained here enables you to read your tax advisor's reports, make strategic decisions, and keep your company on track. Invest in your financial literacy — it pays off!