Which annual financial statements do you need as a sole trader?
The core consists of a balance sheet, a profit and loss account and notes to the figures that require explanation. In everyday language, these statements are also referred to as annual accounts or financial statements.
- The balance show on a single date what assets and liabilities your business has and how much equity remains.
- The profit and loss account show which revenues and costs belong to a period and what the result is.
- The explanation for example, makes clear how you value assets and what makes up important outstanding amounts.
You use the figures to assess your business and as the basis for the business part of your tax return if you are an entrepreneur for income tax purposes. The Tax authorities designate the balance sheet and profit and loss account in the data checklist for business owners.
Does a sole trader have to file annual accounts?
No. A sole trader is not required to publish annual accounts with the Chamber of Commerce. That is different from keeping proper accounts and determining your tax figures. The the filing requirement as described by the Chamber of Commerce, for example, does apply to a private limited company. As a sole trader, you do not therefore need a public Chamber of Commerce annual accounts file, but you do need reliable financial data.
Example of a profit and loss account
Take the example of a hypothetical self-employed adviser running a sole trader business. In the example year, the adviser has a turnover of €60,000 and costs of €20,000. The amounts below exclude deductible VAT. This simplified example does not include any tax additions, deduction restrictions or special profit adjustments.
| Post | Amount |
|---|---|
| Revenue from contracts | €60.000 |
| Contract staff | €12.000 |
| Software and subscriptions | €1.800 |
| Travel expenses | €1.200 |
| Business insurance | €1.000 |
| Other operating costs | €1.500 |
| Depreciation of fixed assets | €2.000 |
| Business interest expenses | €500 |
| Total cost | €20.000 |
| Result: turnover minus costs | €40.000 |
The result is €40,000 before income tax and any tax deductions. This is not necessarily the amount that the adviser can spend privately. Some of the turnover may not yet have been received, and some of the money may be needed to meet financial obligations.
Why is depreciation listed under ‘expenses’?
A fixed asset may last for several years. The costs are then spread over its useful life through depreciation. In this example, the carrying amount of the fixed assets at the start of the year was €6,000. There were no purchases or sales. After €2,000 has been written off, €4,000 remains on the closing balance sheet. In reality, the correct depreciation depends on the fixed asset, its useful life, residual value and tax rules.
Example of a balanced balance sheet
On the last day of the same example year, these amounts appear in the accounts. The amounts for accounts receivable and accounts payable are the actual outstanding balances. To maintain the relationship between the figures, we assume in this example that there is no VAT receivable or VAT payable on that date.
| Possessions | Amount |
|---|---|
| Fixed assets after depreciation | €4.000 |
| Amounts still to be received from customers: trade receivables | €6.000 |
| Business bank account | €17.000 |
| Total assets | €27.000 |
| Equity and liabilities | Amount |
|---|---|
| Equity | €20.000 |
| Business loan | €5.000 |
| Outstanding to suppliers: trade payables | €2.000 |
| Total equity and liabilities | €27.000 |
Both totals are the same: €27,000. You can also work it out the other way round: €27,000 in assets minus €7,000 in liabilities equals €20,000 in equity. Equity is therefore not the same as your bank balance. It also includes business assets and money that customers still owe.
The structure depends on your business. For example, if you have stock, prepaid expenses or VAT payable, these should also be included in the statement. Break down liabilities by maturity where necessary. Furthermore, the book value of a fixed asset is not necessarily the amount you would receive if you were to sell it.
How do profits end up in your equity?
At the start of the example year, the adviser had €10,000 in equity. Profits increase that equity. A cash injection from personal funds does the same, whilst withdrawing funds for personal use reduces the equity.
| Change in equity | Amount |
|---|---|
| Equity at the start of the year | €10.000 |
| Plus: profit for the year | €40.000 |
| Plus: money deposited from private funds | €2.000 |
| Min: drawings for personal use | €32.000 |
| Equity at the end of the year | €20.000 |
The outcome ties in with the balance sheet. The €2,000 private capital injection is not turnover. The €32,000 private withdrawal is not the owner's salary or deductible business expenses. According to the Dutch Tax and Customs Administration: do private deposits and private withdrawals affect business assets?, but they do not in themselves constitute business income or deductible expenses.
Why is the bank balance not €40,000 then?
Profit and cash follow different movements. Customers still owe €6,000, there is €6,000 in supplier invoices outstanding, the entrepreneur has withdrawn €32,000 for personal use and deposited €2,000. The loan and depreciation also affect cash and profit differently.
For example, receiving a loan increases both the bank balance and the liability, but is not turnover. Repayment decreases the bank and the liability, but is not an operating expense. Business interest can, however, be an expense. You can find more explanation in the article about turnover, profit and cash flow.
What checks do you carry out before using your annual accounts?
An accounting software can generate reports, but missing or incorrectly posted data will not automatically become correct as a result. Check at the very least:
- Bank and cash: do the balances on the balance sheet reconcile with the actual balances on the end date?
- Outstanding invoices: do the receivables and debts still exist? Have receipts, payments and credit notes been processed?
- Capital assets: Have purchases, sales and depreciation been processed and are the remaining carrying amounts explainable?
- Correct period: Do the costs and revenues belong to this year? Check prepayments and work around the year-end, among other things.
- Private and business: have private withdrawals and deposits been booked separately and not as revenue or business expenses?
- Taxes and loans: have the outstanding balances been reconciled with tax returns, assessments and loan statements?
- Connection: Does the opening balance reconcile with the previous year and does the change in equity explain the closing balance?
A balanced trial balance is a necessary check, but not proof that every posting is correct. A purchase posted to the wrong expense account can still result in a balanced ledger.
From annual accounts to income tax
Accounting profit is the starting point for the tax calculations. Corrections and deductions may mean that the amount on which you ultimately pay income tax is different. Furthermore, your personal tax return includes more than just your business.
Therefore, do not simply enter your bank balance or private withdrawals as profit. Read how income tax for the self-employed works.
Frequently Asked Questions
Are annual accounts and a personal income tax return the same thing?
No. The annual accounts describe the financial position and results of your business. The tax return uses that information, with the necessary tax processing, and also contains personal details. Therefore, a PDF with annual accounts does not replace the tax return.
What if my balance balances, but the amounts are incorrect?
There may still be an error in the records, such as a duplicate invoice or an incorrect classification. Check the underlying documents and reconciliations. Do not add an arbitrary balancing item to clear a discrepancy.
Which annual figures does a bank or mortgage lender request?
That varies per application and lender. Ask in advance which periods, explanation and any statements are required. A printout from your accounting package is not automatically the same as all the documents the lender requires.
As a new sole trader, should I wait until December?
No. Interim figures help to monitor the development of turnover, costs and outstanding amounts. Clearly state which period the overview covers. A three-month result is not a full-year result.
