Basic requirements for the organisation of accounting
- Each company must prepare and submit an annual return to the Commercial Register for the previous year by June 30 of the current year.
- All business transactions must be recorded in accounting programs.
- All business transactions must be documented.
- Accounting should provide a reliable, objective, and comparable view of the financial situation, performance, and cash flows of the company.
- All accounting documents must be kept in the archive for at least 7 years.
Opening balance sheet
To begin with, you should prepare an opening balance sheet, which lists the assets, liabilities, and the share capital of your company before you start an economic activity.
Accounting policies and procedures
Procedures for maintaining internal accounting should be developed at the beginning of the activity.
Internal accounting procedures should:
- Describe the required chart of accounts with a description of the content of these accounts.
- Regulate the procedure for documenting and recording transactions.
- Establish circulation and storage of primary documents.
- Regulate the maintenance of accounting registers.
- Reflect income and expenses in the profit and loss statement.
- Describe the inventory, assets, and liabilities of the company.
- Determine the accounting policy, reporting procedure and other accounting.
Internal accounting rules are binding and individual for each and every company.
Charts of accounting
Estonian companies can choose between two types of income statement schemes. In Chart 1 of the income statement, business expenses are divided by the nature of expenses (for example, material costs, labor costs, depreciation deductions). This is often used by smaller companies that do not need to assort costs by function.
In Chart 2 of the income statement, operating expenses are assorted by function (e.g. cost of goods sold, advertising costs, general administrative expenses). Chart 2 is usually more difficult to implement because all business expenses require a decision about which business function they are associated with. Certain costs (for example, labor costs) must be apportioned pro rata across the various functions. The profit statement based on Chart 2 gives a better overview of the costs of various functions of the company, while the distribution of costs by function is subjective.
The choice of the appropriate chart for the profit statement should be based on which division gives the best idea of the dynamics of the economic activity. However, if it turns out that the current choice of the chart has not justified itself, you can switch to another chart. It should be borne in mind that when moving from one chart to another, comparable indicators of the previous period must also be adjusted retrospectively (in accordance with the new method).
An entity is also required to indicate in its internal accounting procedures whether it is a micro, small, medium, or large company, since there are significant differences in accounting policies and reporting forms depending on the business category.
Methods of accounting
There are two systems for accounting for business transactions in Estonia – accrual and cash accounting. Accounting in Estonian companies is on an accrual basis, but sole proprietors (FIEs) are allowed to account on a cash basis. In the case of accrual accounting, transactions should be recorded as they occurred, regardless of whether the related funds were received or disbursed.
Annual report of an Estonian company
Annually, no later than 6 months after the end of the financial year, an annual report should be prepared and submitted to the Commercial Register containing a comprehensive overview of the company’s results for the previous financial year. In addition to the above, additional reports and declarations must be submitted in accordance with the form, structure, and scope of the enterprise.
The annual report is mandatory for all accounting organisations in Estonia and must comply with the form prescribed by law. The annual report consists of an annual accounting report and a report on the activities of the company.
Financial year report
The financial year of the company is 12 months. In most cases, the fiscal year is a calendar year (from January 1 to December 31), but a company charter or other document that regulates its activities may also set a different fiscal year in accordance with the operating cycle of the accounting entity. In exceptional cases, the financial year may be shorter or longer than 12 months, but not longer than 18 months.
Stages of preparation of an annual report
- Preparation of annual accounts
- Preparation of a report on the activities of the enterprise
- Approval of the annual report
Filing of the annual report includes the following steps:
- Drawing up a proposal for the distribution of profits or coverage of losses for the financial year
- Submission of an annual report for approval
The annual financial statements must contain up-to-date and truthful information about the financial situation, financial results, and cash flows of the accounting organisation. The annual report consists of the main reports (balance sheet, profit and loss statement, cash flow statement and statement of changes in equity) and annexes.
According to the Accounting Law, micro- and small-scale enterprises can prepare an abridged annual report, which consists of at least two main reports – a balance sheet and a profit statement, as well as up to 3 annexes. The micro-enterprise can (optionally) prepare an abridged or full annual report. Therefore, a micro-enterprise that uses the abridged annual report option is not required to prepare a management report.
The abridged annual report of a small-scale company is drawn up in accordance with the Estonian financial reporting standard and consists of two main reports: a detailed balance sheet and an income statement, as well as up to 9 annexes. The small business also undertakes to prepare a management report.
- Medium-sized and large enterprise
The annual report is drawn up either in accordance with the requirements of the Estonian financial reporting standard, or in accordance with the requirements of the International Financial Reporting Standards (IFRS): a management report, 4 main reports, and an average of 15 annexes. A full annual report is required for medium-sized and large companies as well as non-profit associations and foundations.
Financial statements are prepared in Estonian language in euros (the official currency of Estonia), indicating the degree of accuracy used in figures.
Components of the annual report
1. Balance sheet and income statement
The balance sheet reflects the financial situation (assets, liabilities, and capital) of the accounting entity at the end of the financial year. The income statement is a statement of income and expenses and reflects the economic results for the reporting period.
2. Statement of cash flow
This report reflects the cash flow for the reporting period (receipts and payments of cash). The indication of receipts and payments for the reporting period occurs by grouping them in accordance with their purpose for financial, investment, and commercial activities.
3. Statement of changes in share capital
This report reflects changes in the equity of the company during the reporting period. The financial statements include contributions to the share capital and distributions to owners, profit or loss, the effect of changes in accounting policies, increases and decreases in provisions, and other transactions that impact entries in equity.
The number of attachments to the annual report depends on the specifics of the company, but you should definitely include:
- Specification of the financial reporting standard, on the basis of which the annual accounting report was prepared
- The accounting policy used in preparing the annual report
- Clarification of material items of the main reports and their changes during the reporting period
- Other significant circumstances related to the entity’s financial situation, performance, and cash flows
Company management report
The management report provides an overview of the company’s operations and the circumstances that have played a decisive role in assessing the financial situation and business activities, significant events in the financial year, and the expected directions of development in the next financial year.
If at the end of the financial year the capital of the company does not comply with the requirements of the Commercial Code (that is, it is negative), then the management report should describe the actions that are being taken to ensure the stability of the enterprise in the future, if such have not yet been taken.
For accounting entities subject to audit, the management report must include the main financial ratios for the financial year and the previous financial year, as well as the methodology (formulas) for their calculation.
Audit of Estonian companies
An audit or review of the annual financial statement aims to increase the reliability of your company’s financial information in the eyes of investors, shareholders, and the public.
If the company is to be audited, the annual report must be accompanied by a certified/sworn auditor’s report. An audit of annual report is mandatory for accounting entities, the annual report of which must include at least two indicators of the financial year that exceed the following conditions:
- Income/profit from sales – 4,000,000 EUR
- Total assets at the reporting date – 2,000,000 EUR
- Personnel of the company – 50 people
Also, an audit of annual report is mandatory for accounting entities, in whose annual statements at least one of the indicators of the financial year exceeds the following conditions:
- Income/profit from sales – 12,000,000 EUR
- Total amount of assets at the reporting date – 6,000,000 EUR
- The number of personnel is 180 people
An audit of annual accounting is mandatory for:
- All public limited liability partnerships with more than two shareholders
- Local authority
- A state accounting institution
- Legal entities governed by public law
- Political parties and companies receiving funding from the state budget
Organisation of audits
The audit is carried out by an independent appraiser, that is, a certified auditor or an audit firm. The Board of the company appoints an auditor, determines the number of auditors, terms of payment, and the deadline of full powers. Appointment of an auditor requires their written consent. Prior to the audit, it is necessary to conclude a contract with a natural person included in the list of certified auditors in Estonia.
Liability of the parties
The certified auditor is obliged to keep confidential the information obtained during the audit and is liable for damage caused by violation of their duties arising from their professional activities.
It is important to remember that a certified audit report does not relieve the Management Board from liability for the content of the accounting report.