All legal persons and self-employed persons registered in Estonia are subject to accounting requirements. Accounting is an essential part of managing your business and its purpose is to keep records and get an overview of your business performance and financial position.
The accounting must comply with the standards set by the state to make sure that the results are comparable and understandable.
Pursuant to the Accounting Act, accounting entities can choose to prepare their reports in accordance with the International Financial Reporting Standards (IFRS) adopted by the European Commission or with the Estonian financial reporting standard, which is based on internationally accepted accounting and reporting principles. The basic requirements of the Estonian financial reporting standard are set out in the Accounting Act, which is supplemented by the guidelines issued by the Accounting Board of the Republic of Estonia.
Basic requirements for accounting
The accounts must present fairly and objectively the financial position, financial performance, and cash flows of the company in a manner that is comparable and up-to-date.
Economic transactions must have a source document and if necessary, its content and form must enable a competent and independent party to prove the facts and veracity of the economic transaction.
All economic transactions must be recorded in accounting registers within a reasonable time after the economic transaction has taken place.
Every company must prepare and submit an annual report to the business register.
Accounting documents must be preserved (the deadlines for preserving various documents are set out in the Accounting Act).
Key accounting documents
Opening balance sheet
When you incur accounting liabilities, you must first prepare an opening balance sheet, which shows the amount of assets, liabilities, and equity before starting economic activity.
Internal accounting procedure
An accounting entity, except a micro-entity, is required to draw up an internal accounting procedure.
The internal accounting procedures must describe the chart of accounts, including a description of the content of the accounts, the procedures for documenting and recording economic transactions, the circulation and storage of original documents, the keeping of accounting records, the recording of income and expenditure in the income statement, the inventory and recording of assets and liabilities, the accounting principles to be used, the reporting procedures, and other accounting-related aspects. Internal accounting procedures are mandatory and individual for each accounting entity.
Estonian companies can choose between two different income statement formats. In the first format, operating expenses are classified in accordance with the nature of the expenses (e.g. cost of materials, labour, depreciation). This format is often used by smaller companies that do not need to classify costs by function.
In the second format, operating expenses are classified based on the function (e.g. cost of goods sold, distribution costs, general administrative expenses). The second format is usually more difficult to implement, as it is necessary to decide to which business function they relate for all operating expenses. Certain costs (such as labour costs) need to be allocated proportionally between the different functions. The second format gives users a better overview of the costs of the different functions in the company. However, the allocation of costs to functions is subjective and income statements prepared by different companies under the second format may not be comparable.
The choice of the format of the income statement must give the users of the reports a better overview of the performance of the business.
However, if it is found that the current format is not justified, the company may implement the second format. It should be noted, however, that when switching from one income statement format to the other, the comparative figures for the previous period must also be adjusted retrospectively (in accordance with the new format).
A company must also define in its internal accounting procedure whether it is a micro, small, medium, or large enterprise. This is very important because there are significant differences in accounting principles and reporting methods.
Annual report
Each year, no later than 6 months after the end of the financial year, you must prepare and submit to the business register an annual report giving a comprehensive overview of the results of your company for the previous financial year.
Read more about the preparation and submission of the annual report
In addition to the above, you will have to submit additional reports and declarations in accordance with the form of the company, its structure, and the type of activity.
Accrual and cash accounting
There are two different systems of accounting for economic transactions in Estonia – accrual accounting and cash accounting. Accounting in Estonian companies is accrual-based, but the accounts of a self-employed person may be cash-based.
Under accrual accounting, economic transactions must be recorded as they occur, irrespective of whether the related cash is received or paid.
Cash accounting is the recording of economic transactions in accordance with the cash receipts or payments relating to the economic transaction.