Accounting – how it works

This is accounting

Accounting is a system of organization and processing of a company's financial transactions. In practical terms, it involves saving receipts, invoices and other documents, then registering and reporting them in chronological order (books of original entry or daybooks) and in systematic order (general ledger).

Transactions are documented through verifications, for instance invoices, receipts, debt securities, bank statements, and other documents that contain information about the business transaction.

The company's accounts consists of

• verifications
• basic and general ledger
• profit and loss reports
• annual accounts or annual report.

The status of your company

By keeping accounts, you obtain essential financial information about the company. You can produce up-to-date progress reports each month that provide you with answers to questions like:

• What was the profit/loss for the month
• What was the profit/loss in comparison with the previous month or year
• What does this mean in the short term and how will the business be affected in the longer term
• How much money can you take out of the business.

This information helps you make financial decisions to ensure the company develops in the right direction and at the right time. The accounts also form the basis for taxation of your business operations, as they provide you with the information for your income tax return.

Others also want to know how your business is going

Besides yourself, there are a number of stakeholders who are interested in how your business is going and how it is being managed. By having your accounts in order, these stakeholders can get information about your business.

Stakeholders might include:

• Financiers, when you need to borrow money, the bank or another financial institution will want to know that your business is creditworthy.
• The Swedish Tax Agency, for accounting of VAT, social security contributions and preliminary tax.
• Suppliers, where you wish to trade on credit (payment against an invoice).
• Customers, long-term collaborations often require that you demonstrate sound finances.
• Investors, if you want them to become co-owners or inject venture capital.

Accounting software

You may keep accounts manually in a column diary or use accounting software. The principle is the same. You are however not permitted to do your accounting in a general spreadsheet program such as Microsoft Excel. You must use specialised accounting software that has been adapted to current bookkeeping legislation and that logs all of your data.

Do accounting yourself or hire help

For many new entrepreneurs, accounting is difficult because it takes time away from actually running the business, and there are many rules your company needs to comply with. If you choose to hire a consulting accountant, accounting firm or other professional help, you will be relieved of this workload and gain an expert to discuss matters with.

SRF-konsulterna, the association of Swedish accounting and payroll consultants, and FAR (the Swedish Institute of Authorised Public Accountants), which is the industry organisation for consulting accountants, authorised public accountants and accounting firms in your locality.

SRF konsulterna, the association of Swedish accounting and payroll consultants

FAR, the industry organisation for consulting accountants, authorised public accountants and accounting firms

You are responsible for the accounting being correct

Note that even if you hire someone to help you with your accounting, you in your role as the business owner are always ultimately responsible for your accounting to be done correctly.

The accounting and all documentation must be saved for 7 years.