Bookkeeping structure – balance sheet, income statement, and entries

Last updated 17 days ago

The purpose of bookkeeping is to produce information about the company's financial position, both for the company itself and for external stakeholders such as the tax authority, banks, and investors.

The basic logic of bookkeeping

Bookkeeping always follows the same path:

  1. A business transaction happens in the company, for example a sale or a purchase

  2. The transaction must have a voucher — a receipt, invoice, contract, or other document that proves the transaction

  3. Based on the voucher, an entry is made in the bookkeeping to the correct accounts. The VAT portion is broken out automatically once the accounts have the correct VAT treatment and rate set

  4. All the entries of the financial year form the financial statements, which are the official report for external stakeholders. Interim reports can be printed at any time during the financial year

Single-entry or double-entry bookkeeping?

NoCFO always does bookkeeping as double-entry. In single-entry bookkeeping, only income and expenses are recorded, which produces an income statement. It's suitable only for sole traders with low revenue.

Double-entry bookkeeping also takes into account the company's assets and liabilities. It produces both an income statement and a balance sheet, and is the recommended approach for sole traders too, whenever it's possible.

Balance sheet

The balance sheet shows the company's financial position at a specific point in time, usually the last day of the financial year. It consists of two halves:

Assets show what the company has — its property. It's divided into non-current assets (real estate, equipment, patents — long-term assets) and current assets (inventory, receivables, money in the bank account — short-term assets).

Equity and liabilities show how the assets are financed. It's divided into equity and liabilities, i.e. debt.

Equity consists of capital invested in the company (share capital, SVOP reserve) and accumulated retained earnings.

Liabilities, i.e. debt, consist of funds borrowed from outside parties, such as accounts payable and bank loans. Liabilities are divided into short-term (repaid within a year) and long-term (repaid in more than a year).

The basic principle of the balance sheet: assets = equity and liabilities. The totals of both halves of the balance sheet must always match.

Income statement

The income statement shows the company's income and expenses over a specific period, for example the whole financial year. It shows whether the company made a profit or a loss.

Income consists mainly of revenue, which is the combined VAT-free amount of sales income. Other income items include other operating income (for example, a gain on the sale of a car) and financial income (interest income, investment income).

Expenses are divided into several items, the most common of which are materials and services, personnel expenses, depreciation, other operating expenses (premises costs, vehicle costs, marketing costs), and financial expenses and income taxes.

More information

More information on the bookkeeping obligation and the limits of cash-basis bookkeeping can be found on the vero.fi website.