There are two types of bookkeeping in Germany:

1. Bookkeeping – Balance sheet

If you are a company your accounting is based on a profit and loss statement and a balance sheet. Income is booked as soon as you have delivered a receivable and costs are booked when you have received the service as a liability. With the payment the receivables and the liabilities are balanced. So you have to perform two bookings for each business transaction. At the end of the year the receivables are checked, as to whether or not they are still of full value. Furthermore, accruals (taxes, future tax consultant cost for the financial statement and the tax declarations) have to be booked and sometimes deferred taxes.

In case of the balance bookkeeping you should always choose „Sollversteuerung“ (debit taxation procedure) for VAT purposes. This means that every business transaction is booked for income and for VAT purposes identical, namely when services have been rendered and the invoice has been issued.

2. Bookkeeping – Net income method

If you are an entrepreneur you can usually choose if you want to do the bookkeeping based on the balance sheet (see above) or if you want your bookkeeping to be based on a cash flow basis (so-called net income method). In the latter case, revenue and expenditure will only be booked if the money has been paid. With this type of bookkeeping you will only have to book one entry per transaction. The advantage is also that you only have to pay taxes for the income which you have received not the income you have invoiced but have not received the payment.

If you have chosen the net income method you should use the „Istbesteuerung“ (actual taxation) for VAT purposes.

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Krischan TreydePlease contact me if I may give you further explanations.
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Best regards

Krischan (Kris) Treyde (CV)
Lawyer and Tax Consultant