Tax records or accounting - which is right for you?
Tax records and accounting are two different things. It is common for new entrepreneurs to be confused about these concepts and not know which one to choose. So let's explain both terms. We will describe the differences and you will learn who has to keep tax records and who has to keep accounting records.
WHAT IS TAX REGISTRATION?
The main objective of tax registration is to establish the income tax base for the purpose of completing the tax return and to pay the correct tax to the tax office. The tax base is then also used in reports for the Social Security and Health Insurance Institutions. At the same time, the tax records provide you with a summary of the status and movement of your assets and liabilities for the tax period. In short, tax records are a very simplified form of accounting (and were called such in the past), but they are not accounting in the true sense of the word.
WHO MUST KEEP TAX RECORDS?
If you are an entrepreneurial natural person, are not registered in the Commercial Register and for the purposes of determining the tax base you use income records and apply actual expenses to them (i.e. you do not use lump-sum expenses as a percentage of income), then tax records are for you. In order to keep tax records, your annual income cannot exceed CZK 25 million.
HOW TO KEEP TAX RECORDS?
Keeping tax records is much simpler than bookkeeping, but tax records must also comply with the requirements of the Income Tax Act:
- information on income and expenditure (so that the income tax base can be determined),
- information on assets and liabilities.
The law also specifies only the information you must provide to calculate the tax base. It is up to you what form you record them in. You can get an online platform for recording income and expenses, accounting software or simply create an excel spreadsheet.
The tax records must definitely contain:
- the date of issue of the document,
- the document number,
- a description of the transaction (an understandable verbal description that makes it clear to you and, where appropriate, to the tax authorities),
- an indication of whether it was income or expenditure,
- the value of the income or expense and whether it is tax deductible,
- the amount of VAT received or paid (if you are a VAT payer).
Under the asset and liability register, you then state:
- fixed and small assets,
- liabilities - how much you have to pay, to whom and when it is due,
- debts - how much is owed to you and within what timeframe you have to pay the debt.
Many entrepreneurs can take care of their own tax records, but if you want to focus on your business, it's better to leave these concerns to professionals. This will save you valuable time and ensure that your tax records contain everything you need. If you decide to use the reliable services of our expert advisors, everything will be done quickly and correctly - you will not have to study the legislation and waste time communicating with the authorities.
ARE YOU A VAT PAYER?
If you are a VAT payer, in addition to the tax records, you also keep records for value added tax purposes, i.e. you record data that are necessary for the preparation of the VAT return and the control report. As a VAT payer, you must keep records for VAT purposes even if you apply flat-rate expenses.
WHAT IS ACCOUNTING AND WHO IS IT FOR?
There are several definitions of bookkeeping, but simply put, it is a more extensive and complicated process than tax accounting, which is why businesses often seek accounting services. All legal entities (such as companies) and individuals who have become an accounting entity keep accounts. As an individual, you become an accountant when your annual turnover exceeds CZK 25 million.
We have extensive experience in bookkeeping, we take care of the legal requirements and provide regular feedback. This saves you time that you can spend on what is really important to your business.
THE MAIN DIFFERENCES BETWEEN TAX RECORDS AND ACCOUNTING IN A NUTSHELL
Tax accounting used to be called simple accounting . Accounting as we know it today was called double-entry bookkeeping. While the terminology may confuse you, understanding the differences is easy.
Tax records are used primarily to determine the correct amount of the income tax base, which is determined as the difference between income and expenses. It contains data on costs, expenses, assets and debts. It is kept by natural persons who have income from business or self-employment (self-employed persons) and wish to claim real expenses.
TAX RECORDS = DIFFERENCE BETWEEN INCOME AND EXPENDITURE
- Receipts - money received in a bank account or cash register, the moment of payment is essential.
- Expenses - the loss of money in the bank account or cash register, the moment of payment is crucial.
Accounting, on the other hand, provides a more comprehensive view of a company's performance. The tax base in accounting is determined as the difference between income and expenses. Accounting is compulsory for all business entities registered in the Commercial Register.
ACCOUNTING = DIFFERENCE BETWEEN INCOME AND EXPENSES
- Revenue - performance expressed in CZK, where the moment of performance is essential (e.g. the revenue arises on the date of invoice issuance, not when it is paid).
- Costs - consumption of economic resources, external performances or work of the company's employees, the crucial point is again the moment of performance, not payment.
FLAT-RATE EXPENSES AND FLAT-RATE TAX
It is not uncommon for self-employed persons not to keep tax records or accounts and instead apply so-called lump-sum expenses, where they only keep records of their income and receivables. This case mainly concerns small traders with annual income of up to CZK 2 million, who choose to apply expenses as a percentage of income, also known as a lump sum.
If you apply a flat-rate expenditure, you do not need to keep any records except for invoices issued (and records for VAT purposes if you are a VAT payer). You then file a tax return once a year.
If your annual business income does not exceed CZK 1 million, you can apply for a flat-rate tax. This means you don't even have to file a tax return, you just pay a fixed amount each month. In addition to the tax, this also includes advance payments for health and social insurance.
YOU STILL DON'T KNOW WHAT TO DO?
If you are unsure whether you should keep tax records or accounts, or are looking for an experienced professional to help you with the paperwork involved, contact us.
We will help you decide and handle everything for you, whether you need to sort out tax records or bookkeeping. We are also here for you if you, as a self-employed person, are hesitating whether to keep tax records and apply real expenses or whether to switch to flat-rate expenses or tax. Contact us using the form below and we'll take care of everything.