Switching to double-entry bookkeeping

What it means

Switching to double-entry bookkeeping means moving from tax records or single-entry bookkeeping to double-entry bookkeeping. It happens as a business grows, when an investor joins, when statutory limits are exceeded or when a sole trade is moved into an s. r. o.

Double-entry bookkeeping tracks not just receipts and payments but income and expenses in the period they relate to, along with the state of assets and liabilities. The switch is therefore not just new software but a different way of looking at the business and calculating its result.

On switching, accounts are opened at the actual value of assets and liabilities at the transition date. The tax base is adjusted at the same time for items that would otherwise be taxed twice or not at all, such as receivables, payables, inventory and advances from before the switch.

How it works in practice

Before switching, a stocktake establishes the balances of cash, receivables, payables, inventory and fixed assets, and an opening balance sheet is prepared from it. The list of receivables and payables from the tax records determines the tax base adjustments.

If a sole trader moves into an s. r. o. through a contribution of a business, the company keeps double-entry books from the start and takes over assets and liabilities under the contribution agreement. Selling individual items to the new company instead involves separate purchase contracts and their tax consequences.

The easiest switch is at the start of an accounting period, so the change applies to the whole year and proper financial statements are prepared at the end. It is a good moment to set up new processes too: document flow, chart of accounts, cost centres and regular reporting.

What to watch out for

The most common mistake is mishandling receivables and payables from before the switch. An invoice paid after the switch that was already income in the old system must not be taxed again, and an expense claimed before the switch must not be claimed a second time.

Double-entry bookkeeping is more demanding and costly to run. Before switching voluntarily, weigh whether the benefits, such as a better overview and credibility with banks and investors, outweigh the higher costs and administration.