Bookkeeping in Estonia
Bookkeeping is an integral part of doing business on behalf of an Estonian company, which is to keep records and obtain an overview of the company’s economic performance and financial state.
Accounting is an important part of the day-to-day activities of all persons obliged to keep accounting. Its purpose is to maintain a daily record and constantly obtain an objective picture of their economic performance and financial situation.
According to the Estonian accounting act, the person obliged to keep an accounting: as a legal entity under public law, a local self-government unit, every private or public legal entity registered in Estonia, an individual entrepreneur and a registered branch of a foreign business association.
Thus, all companies and branches of foreign companies operating in Estonia are subject to accounting. Accounting for each company must comply with government-set standards for the results to be comparable and understandable.
The accounting service of the enterprise includes processing and organization of information on the cash flow of the organizations in accordance with the Estonian and EU legislation. Management, accounting and tax registers are established at the customer’s request. Сomplete reporting is done to the Tax Department, the Business Register, the Statistics Department and other related institutions.
It is essential to clarify that depending on turnover and policy, some companies register VAT while others do not. Hence, there are two different paths to follow depending on the company’s VAT status.
Companies with no monthly payments, purchases, invoices and VAT numbers can do accounts once a year before submitting an annual report. In that way, we deal with yearly based accounting.
In this regard, it is significant to consider that companies with no VAT must still collect all source documents and put them in order before submitting an annual report at the end of the year.
VAT or value-added tax is a broadly based consumption tax that not every company must register. VAT is required when the turnover threshold reaches 40,000 EUR. Therefore, there are two different paths to follow depending on the company’s VAT status.
A company with a VAT registered must submit tax returns every month.
It applies even if no transactions are done.
• Each company must prepare and submit an annual return to the Commercial Register for the previous year by June 30 of the current year.
• All business transactions must be recorded in accounting programs.
• All business transactions must be documented.
• Accounting should provide a reliable, objective, and comparable view of the company’s financial situation, performance, and cash flows.
• All accounting documents must be kept in the archive for at least 7 years.
First, you should prepare an opening balance sheet that lists your company’s assets, liabilities, and share capital before you start an economic activity.
Another mandatory requirement for every company in Estonia is the submission of an annual report.
The annual report’s mandatory components include the management report on the company’s activities, the balance sheet, the company’s profit and loss statement, and the company’s capital statement.
You should complete all accounting procedures before drawing up the annual report.
Estonian companies can choose between two types of income statement schemes. Chart 1 of the income statement shows that business expenses are divided by the nature of expenses (for example, material costs, labour costs, depreciation deductions). This way is often used by smaller companies that do not need to assort costs by function.
In Chart 2 of the income statement, operating expenses are assorted by function (e.g. cost of goods sold, advertising costs, general administrative expenses). Chart 2 is usually more difficult to implement because all business expenses require a decision about which business function they are associated with. Certain costs (for example, labour costs) must be apportioned pro-rata across the various functions. The profit statement based on Chart 2 gives a better overview of the costs of various functions of the company, while the distribution of costs by function is subjective.
Financial year report
The financial year of the company is 12 months. In most cases, the fiscal year is a calendar year (from January 1 to December 31). Still, a company charter or other document that regulates its activities may also set a different fiscal year according to the accounting entity’s operating cycle. In exceptional cases, the financial year may be shorter or longer than 12 months but not longer than 18 months.
Company management report
The management report provides an overview of the company’s operations and the circumstances that have played a decisive role in assessing the financial situation and business activities, significant events in the financial year, and the expected development directions in the next financial year.
Suppose at the end of the financial year the company’s capital does not comply with the requirements of the Commercial Code (that is, it is negative). In that case, the management report should describe the actions taken to ensure the stability of the enterprise in the future if such has not yet been taken.
An audit or review of the annual financial statement aims to increase the reliability of your company’s financial information in the eyes of investors, shareholders, and the public. A legal audit allows you to protect your business in time — to detect, minimize or completely neutralize potential risks that financial, reputational, competitive and other losses may entail.