Accounting is not seen by most of us as a fascinating subject. Until you start your own business – and suddenly realise you simply can’t do without it. Accounting, tax and document filing determine whether you are in control of your business, whether you pass tax audits unscathed and whether the tax office will one day knock on your door because of a mistake you made ten years ago.
In this article we will explain what accounting is, who is obliged to keep accounting records and how it differs from tax records. Finally, we’ll look at how long you need to keep your accounts and tax documents and what risks you face if you underestimate the cost of archiving or keeping your accounts.
Simply put: accounting is a systematic record of a business’s assets, liabilities, income and expenses (revenues and costs). The Accountancy Act says that the accounts must give a true and fair view of how a company or business is doing financially.
In practice, this means that the books record every important financial transaction – that is, invoices issued and received, all bank movements, employee salaries, asset purchases, loans, shareholder deposits and profit distributions. All these transactions are systematically recorded in the books of accounts so that they are clear and traceable. These records are then used to prepare the financial statements at the end of the year, which usually include a balance sheet, a profit and loss account and, where appropriate, other summaries as required by law or the specific situation.
Accounting has several roles:
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Many sole traders struggle with whether to keep accounts or tax records. Tax records are a simpler system in which you mainly track your actual income and expenses for income tax purposes.
Accounting, on the other hand, works with what is known as the accrual principle – you account for income and expenses in the period to which they are materially and temporally related, not by the date of payment. It is therefore easier to determine the true state of the company, but more complex to maintain.
This is why smaller trades often find it advantageous to stay with tax accounting until they have to switch to compulsory accounting.
Read when it is worth switching from tax registration to a lump sum and vice versa.
The key concept on which everything is based is the “accounting unit”. This is how the Accounting Act refers to anyone who is obliged to keep accounts. An accounting unit is primarily:
Once you fall into one of these categories, the law imposes an obligation to keep accounts. At that point, a simple table of income and expenditure is no longer sufficient.
As a sole trader, you may find yourself in one of two basic situations in terms of accounting. In the first, you are not obliged to keep accounts. This is typically the case if you are not registered in the Commercial Register, your turnover for the previous calendar year did not exceed CZK 25 million and no other legislation requires you to keep accounts. In such a case, you keep tax records or apply flat-rate expenses.
The second situation occurs if you are obliged to keep accounting records. This is usually the case if you are a natural person registered in the Commercial Register or if your turnover exceeds CZK 25 million. The turnover of CZK 25 million is calculated according to the VAT Act. Typically, it is the value of the transactions made excluding VAT, including selected exempt transactions. Once you exceed this limit, you become an accounting unit from the first day of the following year and must then keep accounts from the next accounting period.
Example: Imagine you are self-employed and run a fashion e-shop. In 2024, you have a turnover of CZK 27 million. From 1 January 2025 you become an accounting entity, but you will only be obliged to keep accounts from the next accounting period, i.e. from 2026.
Even if you’re self-employed and the law doesn’t force you to keep accounts, you may choose to do so voluntarily – for example, because you have a more complex business, banks want your accounts for a loan, or you have an investor who requires “full-fledged” accounts.
Banks and investors usually require financial statements for the last few years and look not only at earnings but also at debt, liquidity and cash flow stability. If you keep your books clearly and on time, you have a better chance of getting a loan or investment on reasonable terms. At the same time, you can quickly tell from your financial statements whether your numbers are consistent over the long term.
During the transition, a so-called transfer bridge is usually made – inventories, receivables, liabilities and sometimes unpaid advances are recalculated so that double taxation does not occur or, on the contrary, some income or expenses are dropped.
The obligation to publish the financial statements is imposed on entities registered in the public register – typically s.r.o., a.s., associations, foundations or SVJ. If you are a self-employed person and you are not registered in the register, you do not have to deposit the financial statements in the collection of documents, even if you keep accounting records.
Most accounting units keep what is known as double-entry bookkeeping. This works in such a way that each accounting transaction is recorded in two accounts – on one side ‘to give’ and on the other side ‘gave’. This always results in an equation that has to fit. In addition, double-entry bookkeeping captures not only the cash flow itself, but also accounts receivable, accounts payable, depreciation of assets, reserves, and other non-cash items that affect a company’s performance.
At the same time, the so-called accrual principle applies. This states that you recognise income and expenses in the period to which they are materially related, not when the bank account is actually settled. This has a major impact on how accounting affects taxes. The accounting result, i.e. the profit or loss in the accounts, may not correspond to the actual cash balance in the account. It is only after adjustments under the Income Tax Act that this accounting result becomes the tax base, the so-called tax result.
From an income tax perspective, we are primarily interested in what is and is not tax deductible in accounting. In particular, we look at tax deductible costs, i.e. expenses that are recognised by the Income Tax Act as costs of achieving, securing and maintaining income. On the other hand, non-tax deductible costs, such as certain contractual penalties, entertainment costs or part of costs related to personal consumption, do not reduce the tax base. Tax depreciation of tangible assets, typically machinery or cars, is also important and often differs from accounting depreciation. Similarly, provisions and valuation allowances are tax deductible only if they meet specific conditions.
If you are a VAT taxable person, the VAT Act requires you to keep records from which you can properly prepare your VAT return and control statements.
In practice, this means that you have to keep an overview of all taxable transactions, i.e. invoices issued to both domestic and foreign customers, and also an overview of all taxable transactions received, i.e. invoices received from suppliers. At the same time, you must clearly distinguish between the different VAT rates, keep track of exempt transactions, intra-community supplies and acquisitions within the European Union, as well as imports and exports. Based on this data, you then need to have sufficient evidence to calculate the correct VAT deduction entitlement. Of course, you also need to keep tax documents for the time period specified by law.
These records are usually part of the accounting records, most often in an accounting software, but it is crucial that the VAT calculation can be clearly reconstructed from them. In other words, when you are audited for tax, it must be clear from your records what specific documents and data you have used to arrive at the reported tax and deductions.
Now we come to the question that plagues almost every business: how long to archive accounting and various types of tax documents. The answer is not entirely straightforward, because several regulations – the Accountancy Act, the VAT Act and the Tax Code – come into play, and each of them sets its own deadlines.
Under the Accountancy Act, two basic time limits apply in a simplified way. You must keep the financial statements and, where applicable, the annual report for at least 10 years. Other accounting documents, i.e. in particular ledgers, inventories, depreciation schedules, chart of accounts and other accounting records that show that you have kept proper accounts, must be kept for at least 5 years. These periods shall always run from the end of the accounting period to which the documents relate. So if you have accounts for 2024, you should keep them until at least the end of 2034.
If you are a VAT payer, there is an additional layer to the above obligations. The VAT Act requires you to keep the tax documents relevant to the assessment of VAT for at least 10 years from the end of the tax year in which the transaction took place. This category includes, in particular, invoices issued and received, as well as credit and debit notes, documents relating to intra-community transactions and also documents relating to assets on which you apply VAT, typically, for example, real estate with a long adjustment period for tax deductions.
The Tax Code also has a role to play, which sets out the so-called time limit for the assessment of tax. This is normally 3 years from the end of the period for filing the tax return. However, this 3-year period may be extended – for example, by filing a supplementary tax return, initiating a tax audit or other actions by the tax authority. As a result, in practice it may run for 10 years or even more in exceptional cases.
That is why we recommend keeping accounting and tax documents for at least 10 years, and even longer in the case of long-term investments, real estate or complex tax disputes. This way, you can be sure that you will be able to prove all the relevant facts years later, should the tax authorities return to the period in question.
The good news is that you don’t just have to keep accounting records on paper these days. The Accountancy Act expressly allows archiving in both paper and electronic form, provided that a few basic conditions are met:
In practice, this means that you can scan and digitise invoices and other documents and then store them in an accounting system or other secure electronic storage. At the same time, you need to ensure that these electronic files remain readable many years from now – this is typically why PDF format, regular backups and access rights settings are used. If you convert a paper document into electronic form and ensure the above requirements, it is not always necessary to archive the original paper document as well.
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Underestimating bookkeeping and tax filing may not really pay off. The risks are essentially twofold – penalties and tax implications.
Firstly, you can be fined for not keeping accounts at all, for keeping them in breach of the law or for failing to keep accounting records for a specified period of time. There are fines for breaches of bookkeeping obligations, which can be calculated as a percentage of the value of assets – so can be very significant for larger entities. Their specific amount also depends on the severity and consequences of the breach.
Secondly, if you fail to provide evidence of your costs or tax receipts during a tax audit, the tax authorities can intervene directly in your taxes. For example, it can disallow certain costs as tax deductible, assess tax and impose penalties and interest on late payment. So a single lost invoice or non-existent archive can mean a financial loss – money that you will have to repay to the government, even many years after the original transaction.
Let’s take a look at some typical situations you may encounter in practice:
Imagine a self-employed person – for example, a graphic designer who has an annual turnover of around CZK 1.5 million, is not subject to VAT and is not registered in the Commercial Register.
In such a situation, he is not obliged to keep accounting records. He can keep tax records or, on the contrary, choose a simpler regime and use flat-rate expenses. However, this does not mean that he does not have to deal with anything. He still has to file a tax return and all tax documents and archive them at least for the duration of the tax assessment period, in practice a minimum of 10 years is recommended.
The next scenario concerns a self-employed person running a successful e-shop selling electronics. In 2023, it reaches a turnover of CZK 26 million, is a VAT payer and has kept tax records until now. This means significant changes for her.
As the turnover exceeds the threshold of 25 million crowns, she becomes an accounting unit from the following year and is obliged to switch from tax records to accounting. In practice, this means that she has to purchase accounting software or approach an accounting firm and at the same time set up her accounting system so that she can easily submit control reports, summary reports and the agenda of intra-community deliveries.
Typical for such a business is that it starts to deal with the so-called transfer bridge – i.e. how to correctly transfer the status of assets, inventories, receivables and liabilities from the tax records to the accounts so that everything is linked to the past and complies with tax regulations.
A third model may be where two partners form an LLC and start a small construction company.
The limited company is an accounting entity automatically, so it must keep accountsfrom the moment it is registered in the commercial register. From the first receipt received and issued, everything needs tobe properly accounted for. If the company is also a VAT payer, there is also the added obligation to keep the relevant VAT records according to the VAT Act. It is therefore crucial for such a company to set up the accounting and taxes correctly from the start – distinguishing between advances and invoices, correctly accounting for depreciation of machinery, contractual penalties, travel allowances and other items. It is on these settings that both corporate income tax and correct VAT reporting depend.
Bookkeeping and tax are mainly based on whether you are an entity. This is always any legal entity, a self-employed person registered in the Commercial Register or an entrepreneur who exceeded a turnover of CZK 25 million in the previous year in accordance with the VAT Act. In such a case, tax records are no longer sufficient and you must keep double-entry accounting based on the accrual principle – i.e. you must account for costs and revenues in the period to which they are materially related, and this accounting result is then used to calculate the tax base after adjustments. If you are a VAT payer, there is also an added obligation to keep detailed records of taxable transactions so that the correct return and control report can be prepared. Smaller self-employed persons who do not meet the limit or other conditions can stay with tax accounting or use flat-rate expenses, but often they also voluntarily choose accounting because of banks, investors or more complex business.
Proper archiving of documents is also key. You must keep your accounts for at least 10 years, most other accounting records for at least 5 years, and usually 10 years for VAT tax documents – and the normal three-year period for tax assessment can realistically extend to more than 10 years. Documents can be archived in both paper and electronic form, but you must always ensure that they are reliable, unchanging and legible at all times. Underestimating bookkeeping and archiving can lead not only to heavy fines under the Accountancy Act, but more importantly to tax assessments, non-recognition of costs and other financial consequences even many years down the line.
A financial year is an accounting period that does not start on 1 January but in a different month – for example, from 1 April to 31 March of the following year. It can be useful for companies whose business has a strong seasonality (e.g. agriculture, tourism) and want the end of the accounting year to be outside the seasonal peak.
The law does not directly impose an obligation to preserve all electronic communications, but requires that the authenticity of the origin, integrity and legibility of accounting and tax documents can be demonstrated. Therefore, if the essential information is only in an email (e.g., discount confirmation, price change, offer acceptance), it is more practical to store such a message with the document or in the contract file. You avoid a situation where you can prove the invoice but no longer the circumstances under which it was issued.
It will first ask you to complete or submit specific documents and set a deadline for you to respond. If you don’t provide the documents, the tax authority may assess tax using a tax assessment method – based on estimates, available information and comparisons – which often results in higher tax. They can also impose a penalty and apply interest on late payment.
In the case of limited companies (s.r.o., a.s.), the managing director may be liable for the company’s debts if he or she breaches the duty to act with due care – and messy accounting is a strong signal to the courts that care has been breached. In the extreme case, poor or deliberately misrepresented accounting may fulfil the criminal off ence of misrepresentation of the state of management and assets. A self-employed person risks having to pay taxes and penalties directly from his or her personal assets as a result of the errors.
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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