In short
Bookkeeping means documenting every financial event in your company properly. So: What is coming in? What is going out? Who do you owe money to? Who still owes you something? For a GmbH or a UG (the two German limited liability company forms) this includes double-entry bookkeeping and, at the end of the financial year, the Jahresabschluss: the annual financial statements with a balance sheet and a profit and loss account.
Why the topic ends up on your desk anyway
Hardly anyone starts a company because they are excited about bookkeeping. It was no different for mika founder Agnieszka: when she started her first company more than 15 years ago, receipts were collected and handed over to the tax advisor at some point. What exactly happened to them after that? Honestly: no idea. Anything involving numbers was somehow “taxes” and therefore something that somebody else would take care of.
Sound familiar? Then you are almost certainly not alone. The only problem is this: as soon as a receipt is missing, the numbers do not add up or the Finanzamt (the German tax office) wants to know something, the topic lands back with you. So let us look at it without unnecessary accounting jargon: what bookkeeping actually is, how double-entry bookkeeping works and what you really need to pay attention to as a founder or managing director.
In this article you will learn:
- What bookkeeping actually is and what it is not
- How double-entry bookkeeping works
- What preparatory bookkeeping means and why it eats up so much time
- Which details an invoice has to contain
- Why Excel is a problem for your bookkeeping
- Why a separate business account makes a lot of things easier
- How much time companies spend on administrative work and how mika helps
What is bookkeeping, exactly?
Put simply: bookkeeping makes it visible what is happening financially in your company.
- You send an invoice? Bookkeeping.
- You buy a new laptop for the team? Bookkeeping.
- A customer pays their invoice? Bookkeeping as well.
It records, in chronological order, what your income, expenses, assets and liabilities are. One of the most important rules is therefore: no entry without a document. Whenever money comes in or goes out, it has to remain traceable what was behind it. That is exactly why invoices and receipts are so essential in bookkeeping.
Many people think of bookkeeping as an obligation created by the Finanzamt. But keeping it clean matters just as much for your own company, because it answers some fundamental questions:
- Profit and loss: Is your company actually earning money?
- Liquidity: How much money is available to you right now?
- Receivables: Which customers still have to pay?
- Liabilities: Which invoices do you still have to settle yourself?
In short: without proper bookkeeping you know how much money is in your account, but not how your company is really doing financially.
Why have we been doing it this way for over 500 years?
Double-entry bookkeeping is considerably older than you might think. The Italian mathematician Luca Pacioli described the system back in 1494 in his work “Summa de Arithmetica”. He did not invent it, though: Italian merchants had been working along similar principles before that. Pacioli was the first to write them down systematically and make them comprehensible for everyone.
And the principle has stuck. Even Goethe later called double-entry bookkeeping “one of the finest inventions of the human mind”. Whether you will be just as enthusiastic after your first Umsatzsteuervoranmeldung (the preliminary VAT return) is another question.
How does double-entry bookkeeping work?
Briefly explained: in double-entry bookkeeping every business transaction is recorded on at least two accounts. That way you do not only record that money has moved, but also the reason behind it.
The idea behind it is actually quite simple. Imagine 2,380 euros arriving in your business account. Nice, for a start. But on its own the number does not tell you much: did a customer settle an invoice? Did you transfer money into the company yourself? Or did the bank pay out a loan?
That is exactly why double-entry bookkeeping exists. Every single business transaction is recorded on at least two accounts, following the “debit to credit” principle. That makes it possible to trace exactly where the money came from and what is behind it economically.
An example to illustrate it: a customer transfers 2,380 euros to you for a service. In simplified terms, this is what happens in your books:
- The balance of your bank account increases by 2,380 euros.
- At the same time, 2,000 euros of revenue and 380 euros of VAT are recorded.
Step by step, this creates a complete picture of your company’s finances. At the end of the year, your Jahresabschluss shows how much profit your company has really made, which taxes are due and which assets or debts arose during the year.
What is preparatory bookkeeping?
The genuinely time-consuming part of bookkeeping is not the posting itself, but everything that comes before it. Where is the invoice for this debit? What were those 89 euros at Amazon spent on, and why is there no matching receipt for that order? This process is a large part of what is called preparatory bookkeeping (vorbereitende Buchhaltung): all documents have to be kept, checked and assigned correctly.
And that is usually where the basic problem starts. Take an Amazon invoice of 89 euros. In your account, your bookkeeping first of all sees nothing but those 89 euros paid to Amazon. But what exactly was bought? Printer paper for the office, a monitor for the home office, or a birthday present that has nothing to do with your company? The same goes for a purchase at the hardware store: were those 35 euros spent renovating your office or your private flat?
Your bookkeeping can only make sense of the reasons once you make the context traceable. That is why misassigned or completely missing documents are more than a tidiness problem: they can affect your tax return, your preliminary VAT return and your Jahresabschluss. So it is worth investing time in preparatory bookkeeping. Not because the individual tasks are complicated, but because the information has to be kept up to date continuously.
Why do correct invoices matter so much?
You paid an invoice, VAT included. So you automatically get that VAT back as input tax, right? Not quite.
To be able to claim input tax (Vorsteuer), an invoice has to meet certain legal requirements. According to § 14 (4) of the German VAT Act (UStG), invoices above 250 euros gross have to contain the following details, among others:
- Full name and address of the supplying company and of the recipient
- Tax number or VAT identification number of the issuer
- Date of issue
- A sequential invoice number
- Quantity and type of the goods delivered, or scope and type of the service
- Date of the delivery or service
- Net amount
- Tax rate and tax amount
If an important detail is missing, it can become a problem at the latest during a tax audit. Since the e-invoicing mandate came into force, you also have to receive and archive B2B invoices in a structured electronic format.
A classic case: the rental agreement
Instead of a monthly invoice, a rental agreement can serve as a permanent invoice. Together with the payment records, it proves the recurring rent payment. What matters most is that all the required invoice details are complete. If, for example, the landlord’s VAT identification number or tax number is missing even though VAT is shown, you have to clarify that and, if necessary, have it added to the contract retroactively. A small formality like this quickly turns into a rather annoying task.
Can I just do my bookkeeping in Excel?
The question comes up quite often: “Why do I even need accounting software for this? I can simply enter my income and expenses in Excel.” For simple internal overviews you can of course use Excel. As a system for ongoing bookkeeping that complies with the GoBD, an ordinary Excel sheet is not enough.
The decisive point are the GoBD, the German principles for the proper keeping and retention of books, records and documents in electronic form. They include the following requirements, among others:
- Traceability
- Completeness
- Accuracy
- Timeliness
- Order
- Immutability
The last point, immutability, is where Excel runs into trouble. An example: four months ago you entered 900 euros as income. Today you open the file again, change the value to 700 euros and save. A plain Excel file therefore cannot guarantee audit-proof documentation: there is no way to see which figure was there before, nor how the change came about.
But exactly those steps are indispensable for the traceability of clean bookkeeping. Under § 146 of the German Fiscal Code (AO), every change has to remain traceable. When you correct something, it has to stay visible which value was originally recorded and how it was changed afterwards. That may sound like a technical detail, but these changes have to remain clearly traceable years later, too. For how long exactly, see our article on retention periods.
Why a separate business account makes a lot of things easier
A separate business account makes your life considerably easier as well. For a GmbH or UG, keeping company assets and private assets apart is part of the deal anyway. But even for sole traders, a separate business account is one of the simplest ways to have less chaos in the books.
Why? You have recurring running costs going through your account. That can quickly add up to more than 200 payments a month: supermarket, Spotify, customer payment, rent, restaurant, software subscription, drugstore. And here is the problem: a few weeks later you are supposed to work out which of them were business expenses and where the matching documents are filed. Not impossible, but time-consuming when there is no clear process for it.
If you separate private and business payments cleanly from the start, that is not only clearer, it also saves you a fair amount of time.
How much time does bookkeeping take?
Bookkeeping is rarely the task that takes up your entire working day. The problem is the constant stream of small recurring jobs: an invoice is needed here, a receipt is missing there, a question has to be answered and a payment has to be assigned. And another hour is gone.
Various studies show how large the administrative effort is for companies overall:
- According to the KfW Mittelstandspanel, medium-sized companies in Germany spend an average of around 32 hours a month on bureaucracy. That is roughly 7 percent of their working time.
- The IAB/ZEW Gründungspanel arrives at around nine hours a week for legally required administrative tasks in young companies.
Those are hours in which you are not developing your product, not winning a new customer and not moving your company forward. And that is exactly why mika was founded. You can handle your bookkeeping even with little prior knowledge, because the steps are simplified or automated:
- Documents in, data out: You upload your receipts. mika reads out the relevant information so you do not have to type it in yourself.
- Transactions and documents belong together: mika compares bank movements with the corresponding receipts and assigns them to each other.
- Open questions cleared up straight away: If the context of an expense is missing, mika asks you specifically. You answer right away and do not have to reconstruct weeks later what you ordered at Amazon.
The goal behind it is quite simple: at any point in time you should know exactly what is happening in your bookkeeping.
What bookkeeping is not
When it comes to bookkeeping, a few topics tend to get lumped together. So you know exactly where the line runs:
Bookkeeping is not the same as tax advice. Bookkeeping documents and processes your company’s business transactions. Tax advice goes beyond that and can include tax planning and consulting, for example.
Bookkeeping is not a once-a-year task. Collecting receipts somewhere for eleven months and sorting everything out in December is not a particularly good idea. Business transactions have to be recorded in a timely manner.
And bookkeeping does not work on gut feeling. Whether an expense is business related and how it is posted depends on the actual facts. “Feels like business” is unfortunately not enough for the Finanzamt.
Frequently asked questions (FAQ)
What is the difference between bookkeeping and accounting?
In everyday language both terms are often used interchangeably. More precisely, Buchführung describes the actual recording of business transactions on the corresponding accounts. Buchhaltung is often understood more broadly and also covers document organisation, preparatory bookkeeping and reporting.
Does a GmbH have to use double-entry bookkeeping?
Yes. A GmbH and a UG are corporations and are generally required to use double-entry bookkeeping and to prepare a Jahresabschluss with a balance sheet and a profit and loss account. A simple cash-basis income statement is not an alternative for them. Our checklist for GmbH bookkeeping shows which other obligations come with it.
What happens if I lost a receipt?
The basic rule is: no entry without a document. If a receipt really does go missing and you cannot get a replacement from the issuer, a self-issued receipt (Eigenbeleg) can be an option in certain cases. On it you document the date, the amount, the recipient and the reason for the payment, among other things. Important: an Eigenbeleg does not replace a proper invoice for the input tax deduction. As a rule you therefore cannot claim the VAT it contains as input tax.
Can I use mika if I already have a tax advisor?
Yes. mika handles your ongoing bookkeeping and makes sure the necessary data and documents are available in a structured form. Your tax advisor can build on that, for the Jahresabschluss or other tax matters, for example. So you do not have to choose between mika and your tax advisor. And if you do not have a tax advisor yet, mika can connect you with a suitable partner from its network.
How long do I have to keep accounting documents?
Different statutory retention periods apply depending on the type of document. Which period applies in a specific case depends on the type of document and the legal rules in force. So do not simply delete or destroy documents just because the financial year is over.
Conclusion
You started a company, not an evening job of chasing missing receipts. That is exactly why mika takes on as much of your ongoing bookkeeping as possible. Automated, but not without people.
- Book a slot with our team: let us talk about your current bookkeeping for 15 minutes and see whether mika fits your company.
- Watch the demo: take a look at mika yourself and see how ongoing bookkeeping works.