What impact does the choice of profit determination method have on the annual financial statements?
August 16, 2022 | 30,00 EUR | answered by Louis König
Dear tax advisor,
I have a question regarding the method of determining profits and its impact on the annual financial statements. Currently, I am running my business based on the principle of income-expenditure accounting (EÜR). However, I am wondering if it would be beneficial to switch to double-entry bookkeeping.
Currently, I am able to get a good overview of my income and expenses with EÜR. However, I feel that with double-entry bookkeeping, I might be able to get a more precise and comprehensive representation of my business. I am wondering if the switch would be worth it and what implications it may have on my annual financial statements.
My concern is that switching to double-entry bookkeeping may involve increased effort and that I could potentially lose time and resources as a result. At the same time, I am unsure if the accurate and detailed representation of my company's financial position could have a long-term positive impact on my business decisions.
Could you please explain to me what specific effects the choice of profit determination method could have on my annual financial statements? What are the advantages and disadvantages of using double-entry bookkeeping compared to EÜR? And could you possibly provide recommendations on whether a switch would be beneficial for my business and how I can best implement it?
Thank you in advance for your support and advice.
Sincerely,
Sebastian Niemeyer
Dear Mr. Niemeyer,
Thank you for your inquiry regarding the method of determining profits and its impact on the annual financial statements. The decision on whether to switch your company from the income-surplus calculation to double-entry bookkeeping is an important and far-reaching decision that should be carefully considered.
Firstly, I would like to explain the differences between income-surplus calculation and double-entry bookkeeping. With the income-surplus calculation, only actual income and expenses are recorded, whereas with double-entry bookkeeping, all business transactions are posted to accounts. This provides a more detailed representation of your financial situation, as it includes not only income and expenses but also assets and liabilities.
Double-entry bookkeeping thus offers a more precise analysis of your company's figures and enables better planning and control of your business processes. You will receive a complete annual financial statement, consisting of a balance sheet, profit and loss statement, and notes, which can be better understood by external parties such as banks or investors.
However, double-entry bookkeeping also involves higher administrative effort. You will need to make regular entries, maintain accounts, and prepare financial statements. This may require more time and resources than income-surplus calculation, which is more focused on simple recording of income and expenses.
Regarding your annual financial statements, switching to double-entry bookkeeping could have various impacts. On one hand, it could enable better comparability of your company's figures and potentially optimize your tax burden. On the other hand, accurate recording of your business transactions could lead to more transparent financial reporting.
Ultimately, the decision on whether to switch from income-surplus calculation to double-entry bookkeeping depends on various factors. It is important to carefully weigh whether the additional effort and costs of the switch outweigh the potential benefits. I recommend seeking assistance from an experienced tax advisor to help you with decision-making and implementation of the switch.
I hope this information has been helpful to you and I am available to answer any further questions.
Sincerely,
Louis König
