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).

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.

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.

The annual report is obligatory for all undertakings operating in Estonia and it must conform to the form established in legislation. The annual report consists of the annual accounts and the management report.

A company’s financial year is 12 months long. A financial year generally coincides with the calendar year (1 January-31 December), but a company’s articles of association may specify a different financial year. In the selection of the most suitable financial year, it should be considered that the selected 12 consecutive months are chosen so that the period would be in keeping with the operating cycle of the accounting entity. One should not also forget that a financial year must always start on the first date of a month and end on the last date of a month (e.g. start on January 1 and end on December 31).

When a company is established, dissolved, or the beginning date of the financial year changed, the financial year may in these exceptional cases be shorter or longer than 12 months, but not longer than 18 months.

Stages of preparing an annual report:

• Preparing the annual accounts
• Preparing the management report
• Approval of the annual financial report

The submission of an annual report entails the following steps:

• Auditing
• In the case of a company, preparation of the profit distribution proposal or proposal on covering of loss for the financial year
• Submission of the annual report for approval

You are required to file the annual report with the Commercial Register within six months of the end of the financial year. The report can be filed electronically via the e-Commercial Register Company Registration Portal.

When filing your annual report, all of your permissions and notices that have been entered in registries are displayed, and you must confirm that you have met the notification obligations established in law or that the aforementioned notification obligations do not exist. Before you confirm your data, check your data in the Register of Economic Activities and make sure the data is correct. If there are inaccuracies in the registry data, submit a notice to have the data amended.

Guidelines for filing the annual report electronically