The basis for organising accounting and financial reporting is the Accounting Act. Accounting matters are supervised by the Accounting Standards Board, set up by the government, that also provides accounting guidelines explaining and clarifying the Act.
An accounting entity is required to set up accounting policies and procedures establishing the charting of accounts as well as a description of the contents of the accounts and which regulate, among other things, the documentation and recording of business transactions, the flow and preservation of source documents, the maintenance of accounting journals and ledgers, the presenting of revenue and expenditure under income statement items, and the physical inventory of assets and liabilities.
In addition, it regulates the accounting policy and presentation format used by the accounting entity, the procedure for preparing financial statements, the usage of accounting software, and the circumstances relating to the organisation of accounting and the implementation of related internal audit measures.
An accounting entity is required:
- to organise its accounts in such a way as to ensure the provision of up-to-date, relevant, objective and comparable information concerning the financial position, economic performance and cash flows of the accounting entity;
- to document all its business transactions;
- record all its business transactions in accounting ledgers and journals on the basis of source documents or summary documents prepared on the basis thereof;
- to prepare and submit annual reports and other financial statements pursuant to the procedure provided for in legal acts;
- to preserve accounting documents.
Companies use accrual-based accounting policies. Accrual-based accounting means that business transactions are recorded when they occur, regardless of when cash is received or paid for the transactions.
An accounting entity, besides knowing the accounting system, has to observer whether the accounting entry for the economic transaction is in accordance with regulations provided in the Accounting Act - whether the transactions are documented, whether the transactions are recorded by following the rules for double-entry recording, and whether all the entries contain all required requisites.
Recording business transactions
An accounting entity is required to document and record all its business transactions in journals and ledgers, within a reasonable period of time following a business transaction, in such a way that the submission of reports prescribed by legislation within the specified term is ensured. Business transactions shall be recorded on a double-entry basis where the same amount is debited to one account and credited to another account.
All accounting entries shall be supported by source documents certifying the corresponding business transactions or summary documents prepared on the basis of source documents.
An invoice is a document issued by the seller to the buyer upon selling goods or providing services and it reflects:
- the name of the goods or service sold,
- the quantity; and
- the cost and
- the value added tax added to the cost of the goods or services in the event of a seller of goods/service provider liable to value added tax.
The requirements for invoices are detailed in:
Auditing is regulated by the Authorised Public Accountants Act. An audit is compulsory in cases provided by law.
Inventory can be used for keeping records on goods and (or) keeping records separately on materials and completed products. Materials and products can be interrelated by expenditure norms. Various companies offer inventory software and services.
An accounting system comprises a general journal and a general ledger. Correct accounting is based on a source document that meets all requirements and is the base of accounting. A chart of accounts means a list of accounts used in accounting with the names of accounts, account numbers, account classes, and the explanation of the account.
In the daily journal, all business transactions are recorded on the basis of source documents. The following are required for making entries: transaction date, name and number of the source document, number of the entry, short description of the transaction, and debit and credit accounts with amounts.
The accounting period used is the 12-month financial year. For a financial year, a business owner must prepare an annual report, consisting of financial accounts and a management report. The report includes the auditor's report (in the event of a compulsory audit) and a profit distribution proposal. The annual report must be submitted to the Commercial Register.
The environment for submission of annual reports of the company registration portal of the Commercial Register enables persons to prepare reports according to forms provided by offering summarising and controlling rules, to assign persons who can make entries, allows an auditor to create an electronic auditor’s report, and all authorised persons to sign a digital report.
Storage and submission of documents
The accounting department has an obligation to document (invoices, contracts, cheques, agreements, etc.) and reflect (prepare accounting entries based on the double-entry principle) all their business transactions, to prepare and submit statements (annual reports, other financial statements), and also keep these documents for seven years.
Invoices may be divided into three types:
- a paper invoice handed over or sent by post by the seller to the buyer;
- e-mailed invoice (as an email attachment, e.g. a document in .pdf format, with or without a digital signature);
- an invoice exchanged by systems (e.g. a document in .xml format based on the standard of Estonian e-invoice).
An e-invoice is thus one of the possible forms of invoices. An e-invoice is an electronic document, which is created, transmitted, recorded and stored in an electronic environment, i.e. a document which is handled electronically from the beginning till the end. Requirements for the content of the invoice are independent from the form of the invoice, i.e. requirements for paper invoices also apply to electronic invoices.
Based on the Accounting Act, the Accounting Standards Board elaborates guidelines briefly known as good accounting practices.
Useful information and materials can also be found from the following websites on accounting: