Overview: accounting services for the Estonian company
If you are planning to start a business in Estonia, you need to pay attention to the accountancy of your company as all companies and branches of foreign companies operating in Estonia are subject to accounting.
This blog post was firstly published on our website.
Accounting is an integral part of doing business on behalf of an Estonian company. Its purpose is to keep records and obtain an overview of the company’s economic performance and financial state. Accounting for each company must comply with government-set standards for the results to be comparable and understandable. There are many accounting firms in Estonia providing various accounting services.
- 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.
Opening balance sheet
First, you should prepare an opening balance sheet that lists your company’s assets, liabilities, and share capital before you start an economic activity.
Accounting policies and procedures
Procedures for maintaining internal accounting should be developed at the beginning of the activity.
Internal accounting procedures should:
- Describe the required chart of accounts with a description of the content of these accounts.
- Regulate the procedure for documenting and recording transactions.
- Establish circulation and storage of primary documents.
- Regulate the maintenance of accounting registers.
- Reflect income and expenses in the profit and loss statement.
- Describe the inventory, assets, and liabilities of the company.
- Determine the accounting policy, reporting procedure and other accounting.
We also remind that internal accounting rules are binding and individual for every company.
Charts of accounting
Estonian companies can choose between two types of income statement schemes. In Chart 1 of the income statement, 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.
The choice of the appropriate chart for the profit statement should be based on which division gives the best idea of the economic activity dynamics. However, if it turns out that the chart’s current choice has not justified itself, you can switch to another chart. It should be borne in mind that when moving from one chart to another, comparable indicators of the previous period must also be adjusted retrospectively (following the new method).
An entity is also required to indicate in its internal accounting procedures whether it is a micro, small, medium, or large company since there are significant differences in accounting policies and reporting forms depending on the business category.
There are two systems for accounting firm transactions in Estonia — accrual and cash accounting. Accounting in Estonian companies is on an accrual basis, but sole proprietors (FIEs) can account on a cash basis. In the case of accrual accounting, transactions should be recorded as they occurred, regardless of whether the related funds were received or disbursed.
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.
If at the end of the financial year the capital of the company does not comply with the requirements of the Commercial Code (that is, it is negative), then the management report should describe the actions that are being taken to ensure the stability of the enterprise in the future, if such has not yet been taken.
For accounting entities subject to audit, the management report must include the main financial ratios for the financial year and the previous financial year and the methodology (formulas) for their calculation.
Another mandatory requirement for every company in Estonia is the submission of an annual report.
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.
If the company is to be audited, the annual report must be accompanied by a certified/sworn auditor’s report. An audit of an annual report is mandatory for accounting entities, the annual report of which must include at least two indicators of the financial year that exceed the following conditions:
- Income/profit from sales — 4,000,000 EUR
- Total assets at the reporting date — 2,000,000 EUR
- Personnel of the company — 50 people
Also, an audit of an annual report is mandatory for accounting entities, in whose annual statements at least one of the indicators of the financial year exceeds the following conditions:
- Income/profit from sales — 12,000,000 EUR
- The total amount of assets at the reporting date — 6,000,000 EUR
- The number of personnel is 180 people
An audit of annual accounting is mandatory for:
- All public limited liability partnerships with more than two shareholders
- Local authority
- A state accounting institution
- Legal entities governed by public law
- Political parties and companies receiving funding from the state budget
Organisation of audits
An independent appraiser carries out the audit, that is, a certified auditor or an audit firm. The Board of the company appoints an auditor, determines the number of auditors, payment terms, and the deadline of full powers. The appointment of an auditor requires their written consent. Before the audit, it is necessary to conclude a contract with a natural person included in Estonia’s list of certified auditors.
Liability of the parties
The certified auditor must keep confidential the information obtained during the audit and is liable for damage caused by violation of their duties arising from their professional activities.
It is important to remember that a certified audit report does not relieve the Management Board from liability for the accounting report’s content!
Company in Estonia OÜ provides bookkeeping services in Estonia: