Bookkeeping

What is bookkeeping?

Bookkeeping (German Buchhaltung) is the systematic, complete and document-backed recording of all of a company's business transactions in chronological and thematic order. A business transaction is any event that changes assets, liabilities or earnings, such as an outgoing invoice, a purchase, a salary payment or a bank loan. The law speaks of Buchführung (keeping of books), and practice also of financial bookkeeping (Finanzbuchhaltung, Fibu for short). Bookkeeping is also the name of the department that performs this task.

Bookkeeping resembles a complete household ledger in which the till receipt is filed for every entry. It is the documenting core of accounting. It consists of the general ledger with all nominal accounts, from the bank to revenue, and of subsidiary ledgers. These keep individual areas in detail and appear in the general ledger only as a total: accounts receivable accounting for open customer invoices, accounts payable accounting for open supplier invoices, fixed asset accounting and payroll accounting. The annual financial statements under the German Commercial Code (Handelsgesetzbuch, HGB), the tax returns and all interim evaluations arise from bookkeeping. In funding rounds and company sales, investors and buyers trace every figure presented back to it.

Duty to keep books under the HGB and the German Fiscal Code (AO)

Every merchant (Kaufmann) must keep books and show in them its commercial transactions and the position of its assets in accordance with the principles of proper bookkeeping (Section 238(1) HGB). The GmbH (German limited liability company) is regarded as a commercial company (Section 13(3) of the GmbH Act, GmbHG) and therefore as a merchant by virtue of its legal form (Section 6 HGB). It is therefore subject to the duty to keep books regardless of its size. Ensuring this is the task of the managing directors (Section 41 GmbHG).

For tax purposes, Section 140 of the German Fiscal Code (Abgabenordnung, AO) adopts the duty under commercial law. Freelancers and small sole traders (below the thresholds of Section 241a HGB and Section 141 AO) may determine profit in a simplified way (cash-basis profit calculation, Einnahmen-Überschuss-Rechnung, Section 4(3) of the Income Tax Act, EStG), whereas the GmbH may not. If the bookkeeping is not proper, the tax office can estimate the tax base (Section 162 AO). If cessation of payments or insolvency occurs later, violations can also be criminal offences (Section 283b of the German Criminal Code, StGB).

Double-entry bookkeeping

Double-entry bookkeeping (doppelte Buchführung, often also called doppelte Buchhaltung) books every business transaction to at least two accounts: as a debit (left side of the account) and as a credit (right side of the account), in equal amounts. Balance sheet accounts for assets and liabilities lead into the balance sheet, profit and loss accounts for income and expenses into the income statement (profit and loss account). Profit is thus arrived at in two ways: as the balance of income and expenses and as the change in equity, adjusted for contributions and distributions.

Principles of proper bookkeeping and the GoBD

The principles of proper bookkeeping (Grundsätze ordnungsmäßiger Buchführung, GoB) are in part set out in statute. Entries must be made individually, completely, correctly, in good time and in order (Section 239(2) HGB, Section 146(1) AO). A knowledgeable third party must be able to gain an overview of the business transactions and the position of the company within a reasonable time (Section 238(1) HGB, Section 145(1) AO). In addition there is the principle of supporting documents: no entry without a supporting document. What has been booked must not be altered in such a way that the original content can no longer be determined (immutability, Section 239(3) HGB, Section 146(4) AO).

For electronic bookkeeping, the Federal Ministry of Finance specifies these requirements in the GoBD, an administrative circular on the proper keeping and retention of electronic books, records and documents. Among other things, an internal control system and procedural documentation are required. The latter describes in writing the path of a document from receipt through booking to archiving.

Retention periods

Books, inventories (lists of assets and liabilities as of the reporting date), opening balance sheets, annual financial statements and management reports must be retained for ten years. For accounting supporting documents such as invoices and bank statements, a period of eight years instead of the previous ten has applied since 1 January 2025, and for commercial and business letters six years (Section 257 HGB, Section 147 AO, as at 2026). The period begins at the end of the calendar year in which the document was created, and for books with the last entry. For tax purposes, it does not expire as long as documents are of significance for a tax assessment that has not yet become time-barred. Electronically received documents such as structured e-invoices must be retained in their original format and in machine-readable form.

Account frameworks and charts of accounts

An account framework (Kontenrahmen) is a directory that arranges accounts by classes and numbers, from fixed assets such as operating and office equipment (BGA: office furniture, computers, tools) to revenue and expenses. The standard account frameworks of DATEV, a provider of software for tax advisers' practices, are widespread. SKR 03 follows the operational process (process classification principle), SKR 04 the structure of the balance sheet and income statement under the HGB (financial statement classification principle). The chart of accounts (Kontenplan) is the company-specific selection from it and decides which key figures can be derived without ancillary calculations. Separate revenue accounts for subscriptions, implementations and hardware show the quality of revenue, and separate accounts for hosting and external developers show the Rohertrag (gross trading profit: revenue less the direct costs of the service).

Worked example: three journal entries in double-entry bookkeeping

A software company books three business transactions in March, VAT rate 19%, amounts in EUR. Each journal entry names the debit account first, then the credit account. Input VAT (Vorsteuer) is the value added tax on incoming invoices, which the tax office offsets against the company's own VAT.

• Outgoing invoice for an implementation project: receivables 23,800 in debit to revenue 20,000 and VAT 3,800 in credit
• Incoming invoice from a domestic hosting provider: external services 5,000 and input VAT 950 in debit to payables 5,950 in credit
• Payment received from the customer: bank 23,800 in debit to receivables 23,800 in credit
• Check: debit 23,800 + 5,000 + 950 + 23,800 = 53,550; credit 20,000 + 3,800 + 5,950 + 23,800 = 53,550
• Contribution to earnings: 20,000 revenue minus 5,000 expense = 15,000
• VAT payable for March: 3,800 minus 950 = 2,850

EUR 23,800 has been received in the bank account, and the result is EUR 15,000. Only when the supplier invoice and the tax liability have been paid do the two agree: 23,800 minus 5,950 minus 2,850 = EUR 15,000. Had the customer paid only in April, March would show a profit of EUR 15,000 without any cash received. Investors therefore reconcile revenue, earnings and liquidity against each other.

Bookkeeping in due diligence

Financial due diligence, that is, the review of the financial figures by an investor or buyer before the contract is concluded, starts with the bookkeeping. The trial balance, account sheets with the individual entries, lists of unpaid invoices (open item lists) and the fixed asset schedule are requested, usually for two to three financial years and the current year. From these, the reviewers derive earnings adjusted for one-off effects, net financial debt (financial debt less liquid funds) and working capital, that is, the capital tied up in day-to-day business.

Quality shows in books closed promptly with a regular monthly closing, reconciled bank, customer and supplier accounts, cleared clearing accounts, consistent account assignment and a strict separation between the company and its shareholders. If this is missing, buyers value more cautiously and protect themselves contractually, for example through tax indemnities (the seller assumes taxes for the period before the sale) and retentions from the purchase price.

Distinction: bookkeeping, accounting, financial accounting and cash-basis profit calculation (EÜR)

• Accounting: umbrella term for all the numerical records of the company. Bookkeeping supplies the data; cost accounting, planning and controlling evaluate it.
• Financial accounting (Bilanzierung): recognition and measurement of assets and liabilities as of the reporting date. Bookkeeping records the current year; financial accounting decides on the presentation at year-end.
• Cash-basis profit calculation (EÜR): simplified determination of profit that only sets inflows against outflows and manages without a balance sheet; it is not open to the GmbH.

Common mistakes

• Collecting documents instead of booking continuously. Supporting documents entered retrospectively every quarter miss timely recording and allow no reliable figures during the year.
• Private expenses through the company. If the GmbH bears private expenses of a shareholder, a hidden profit distribution (verdeckte Gewinnausschüttung) is a risk, that is, treatment for tax purposes as a distribution (Section 8(3) sentence 2 of the Corporation Tax Act, KStG). Buyers adjust for such items and ask about the tax risks.
• No procedural documentation. The GoBD require it, yet it is often missing in young companies. As long as the bookkeeping remains traceable and verifiable, it is not rejected on that ground alone; in a tax audit and in due diligence, however, the gap is a finding.
• Subsidiary ledgers not reconciled. If the open item lists deviate from the respective control account, neither of the two values is reliable.
• Open clearing accounts. High balances on accounts such as money in transit or clarification account show payments not yet allocated to any transaction. They must be cleared monthly.

Frequently asked questions

Must every GmbH use double-entry bookkeeping?

Yes. The GmbH is a merchant by virtue of its legal form and is obliged to keep double-entry books regardless of revenue and number of employees, even in a year without revenue. This also applies if it is a small business for VAT purposes (Section 19 of the VAT Act, UStG): this rule concerns only VAT, not the duty to keep books.

May bookkeeping be outsourced?

Yes. Current entries are often handled by the tax adviser or qualified bookkeeping service providers; year-end financial statements and tax returns are as a rule with the tax adviser. Preparatory bookkeeping, that is, collecting, sorting and digitally providing the supporting documents, is often handled by the company itself. Responsibility for proper bookkeeping remains with the management.

How promptly must entries be made?

At the latest by the end of the following month, if the supporting documents have been recorded in an orderly way beforehand. The GoBD distinguish two steps: non-cash transactions should be recorded within ten days, for example by numbered filing of the invoices. The booking to the accounts may then follow month by month. For management and investor reporting, this timeframe is sufficient only if the month is closed promptly afterwards.

What must bookkeeping software be able to do?

It must record entries in accordance with the GoBD and generate from them the VAT advance return, the management accounts (BWA, betriebswirtschaftliche Auswertung) and the trial balance. What has been booked is locked, changes are logged, and for a tax audit the data can be exported in machine-readable form. A certificate for the software does not bind the tax office; settings and processes in the company are also reviewed.

The Roemer Capital view

Before we take a funding round or a sale process to market, we reconcile the figures from the pitch deck, teaser and financial model with the bookkeeping. If, for example, the reported revenue deviates from the revenue accounts, we clarify the difference with the company before an investor asks about it. The bookkeeping itself remains with the client's accounting department and tax adviser.

Our benchmark for preparation is a data room that is ready within 24 hours. This presupposes monthly closed books and reconciled subsidiary ledgers. If the chart of accounts does not separate recurring and one-off revenue, we suggest a new structure together with the tax adviser. From it, the key figures of the equity story, the growth story for investors, can be derived directly.