Why bookkeeping and what is that?
Bookkeeping is something you need to do when you have a business. You can ask someone else to do the bookkeeping for you, or do it yourself, but as entrepreneur you are responsible for correct accounting.
The (Dutch) Tax Services requires every entrepreneur to do accounting and financial record-keeping.
Accounting is the process of recording all financial events in your business. The largest part of the accounting process consists of recording of
- Invoices
- Bills
- Credit and Debit transactions of the company bank account
- Private withdrawals
- VAT declarations
- Depreciations
The financial events are recorded in the administration because they influence the result (the profit) of your company. You usually have to pay taxes on these profits, which is why the Tax services want to know that the administration is correct.
Examples of financial events are:
- Revenue from invoices to customers
- Incurrence of costs and buying stock
- Private withdrawals of money or goods
- Private deposits of money or goods
- Investments in a machine or car
- Depreciation of a machine or car
With the bookkeeping system you work towards the declaration of Income Tax for entrepreneurs that you have to do every year. In this declaration all the financial events are collected because all these events determine the result of your company. As already mentioned, you are required to pay Income taxes on this result, which is why the Tax Services wants to have an overview.
As is explained in more detail at Account on the page on double bookkeeping the administration consists of accounts. These accounts are very similar to a bank account, in the sense that you can transfer money to them as well as withdraw money from them. The main difference is that the money stays within the company.
Because the entire financial administration is called the General Ledger, the accounts are called Ledger Accounts.
For every part of the income tax declaration you need to have a separate account. This is why you have a separate account for:
- Revenue
- Purchase price of materials and stock
- Private withdrawals
- Car and transport costs
- Maintenance costs
On the page Setup we will show which accounts you need to create and why.
In the bookkeeping you record every financial event on the corresponding account. For example, the invoices you send will be recorded at the Revenue account. In this way all invoices will be gathered on this account. On the tax form Income tax there is a part called “Revenue”. When you fill in the tax declaration, you can simply copy the number. In this way the ledger accounts will help you in the bookkeeping.
Accounting is a subject which can be part of some university courses. It can therefore be very complex. However, the accounting of a one-person company or a self-employed person is not that complicated.
When you start with bookkeeping everything is new, but after a while you see the same things popping up. Because there are so many self-employed people and one-person companies in the Netherlands (and perhaps also elsewhere) you can find much information online. This site is an example of course, but you can use the website and phone service of the Tax Services as well as many forums to find your information. The main investment is time and not to mind that you learn something new.
For a proper accounting, a good accounting computer program is a must. Setting up this program correctly is extremely important. With the setup we mean creating the appropriate accounts and tax rates. A proper setup will make the accounting much easier. It also makes doing the tax declarations lots easier, because it will be very straighforward to get the appropriate numbers from your bookkeeping system.
This manual helps you to setup the open source accounting program GnuCash and use it for your financial administration.