Starting a business and dealing with taxes and accounting? Or are you already self-employed and starting to wonder if tax records are still enough or should you switch to accounting? Choosing between tax records and accounting is one of the most important decisions you’ll ever make – and even more so as your turnover grows, you add staff and banks want professional reports.
In this article we will explain the difference between tax records and accounting, who can and who must keep accounting records, how the transition from tax records to accounting works and vice versa, and what accounting and tax records entail in practice. We will also look at how VAT and accounting are related, how long it is necessary to keep accounting and tax documents, and we will use practical examples to show when it makes more sense to choose tax records and when it is more advantageous to switch to accounting.
Tax records are a simpler way to keep track of taxes for individuals – typically sole traders. It is regulated by the Income Tax Act and its main purpose is very practical: the tax records must show what your income tax base is for the year. In other words, the tax office wants to see how you arrived at the figure on your tax return.
The tax records are therefore primarily used to keep track of income and expenditure, and they are broken down in such a way that it is clear what is tax-deductible expenditure and what is not tax-deductible. You also keep track of your assets (for example, your car, computer, machinery or office equipment) and your liabilities and debts – for example, unpaid invoices to suppliers or loans. The tax records also include the information you need for your year-end inventory. Taking stock means reviewing and proving that what you have on paper matches reality – that is, that assets actually exist and liabilities are correctly reported.
For tax purposes, what is important is what you actually paid and received in the year , either on account or in cash. If you issue an invoice in November but the customer does not pay until January, the income will not show up on the tax records until January. Similarly, you will not recognise the expense for the invoice to the supplier until you actually pay it. This is a major difference from accounting, which tracks costs and revenues regardless of the date of payment.
Tax accounting is thus a sensible compromise for most small businesses: it is clear, less administratively demanding and fully sufficient for the tax office. On the other hand, when you need to convince a bank, an investor or a business partner of the stability of your business, its information power may be limited.
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.
Accounting (formerly referred to as double-entry bookkeeping), on the other hand, is a full-fledged system that is regulated by the Accounting Act. Its purpose is not just to calculate tax. Accounting is intended to give a true and fair view of the business – that is, to show as accurately as possible how the business is really doing, what its assets are, what its debts are, what its profits are and how strong its capital base is.
The basic principle of accounting is the so-called double entry. Each accounting case is recorded simultaneously in two accounts – the ‘to give’ side and the ‘gave’ side. You don’t necessarily need to remember accounting slang, the important thing is to understand what it means: there are always two sides to every transaction. When you pay a supplier for goods, your account balance is reduced, but at the same time the liability to the supplier disappears. When you buy a car on credit, you add an asset (the car) but also a debt to the bank. Double entry ensures that these two sides of the transaction are never lost in the accounting.
Another key idea of accounting is the accrual principle. This means that costs and revenues are accounted for in the period to which they are materially and temporally related, not by when the payment was made. For example, if you deliver goods in December but the customer does not pay until January, the revenue will appear in the accounts in December because it is related to that period. Similarly, an invoice from a supplier for services in December is an expense in December, even if you don’t actually pay it until, say, February. This makes the accounts more reflective of the actual performance of the business in each year and allows reasonable comparisons between periods.
Full-year accounting results in financial statements. This usually includes a balance sheet (a summary of the company’s assets and liabilities), a profit and loss account (a summary of costs, income and resulting profit or loss) and a note that explains the accounting policies used and adds important information. For larger companies, acash flow statement and a statement of changes in equity may also be added. For some entities, the law requires the financial statements to be audited by an auditor, an independent professional who assesses whether the accounts give a true and fair view.
Thus, for smaller businesses, tax records are often preferable because they are simpler and cheaper to keep. However, as the business grows, adding employees, loans, leases, inventory, and the need to communicate with banks and investors, full accounting that can show the business in a much broader context begins to make sense.
The next article will tell you when it is worth switching from tax registration to lump sum and switching from lump sum to tax registration.
According to the Accounting Act, legal entities are obliged to keep accounting records. This includes all companies based in the Czech Republic, typically limited liability companies, joint stock companies, cooperatives or associations. Foreign legal entities must also keep accounts if they do business in the Czech Republic or have an organisational unit in the Czech Republic.
However, the obligation may also apply to natural persons – entrepreneurs. Every natural person registered in the Commercial Register must keep accounts. The same obligation also applies to those entrepreneurs – natural persons whose turnover in a calendar year exceeds CZK 25 000 000. In such a case, the self-employed person becomes an accounting entity.
On the other hand, there is a large group of entrepreneurs who can easily remain in the tax register. These are mainly self-employed persons who are not registered in the Commercial Register and whose turnover has not exceeded CZK 25 million. CZK per year. These entrepreneurs can choose whether to use flat-rate expenses or to keep tax records.
Importantly, being a VAT payer does not in itself imply an obligation to keep accounting records. Even VAT payers can continue to keep tax records if they meet the above-mentioned conditions – i.e. they are not an accounting entity under the Accounting Act. Only the obligation to keep separate records for VAT purposes is added to the tax records in order to prepare VAT returns and possible control reports.
In addition to compulsory bookkeeping, there is also the option of voluntary bookkeeping. Some sole traders choose to do this even if they are not required by law to do so. Typically, these are entrepreneurs who want to have professional reporting for a bank or investor, because financial statements and standard accounting reports are easier for financial institutions to understand than tax records.
Another reason may be the planned transfer of a business to an LLC. If a sole trader knows that he will soon form a limited liability company and will be putting part of his business into it, voluntary accounting can help him better prepare for this transformation and have a clearer view of assets, liabilities and results.
Voluntary bookkeeping also makes sense for businesses that have a more complex business structure – for example, multiple sites, employees, leases, loans and a larger volume of assets. In such a situation, tax records sometimes no longer provide a sufficiently detailed and reliable picture.
There are situations where the entrepreneur does not keep either accounting or tax records in the classical sense. However, this does not mean that he does not have to keep records or that he can operate without records at all. It is always the case that you must be able to prove your income and meet your tax and record-keeping obligations, just the form is considerably simpler.
A typical case is self-employed people who claim flat rate expenses. If the entrepreneur pays income tax by applying a flat rate of expenses to the income earned (for example, 60%, 40% or 80% depending on the type of activity), the law does not require them to keep traditional tax records.
However, even in a flat-rate scheme, the entrepreneur cannot do without any records. He must keep track of his income, typically in the form of a simple list of invoices issued, cash receipts or account movements. This data serves as a basis for tax returns and for possible audits.
We have discussedlump-sum expenses for self-employed persons in detail in another article.
A special group are entrepreneurs in the flat-rate tax regime. They do not fill in a traditional income tax return and pay a monthly lump sum, which includes income tax, social security and health insurance. These entrepreneurs are not obliged to keep tax records or accounts either, but again they must be able to prove the amount of income – in particular to meet the conditions for entering and remaining in the flat-rate scheme. In practice, therefore, as with flat-rate expenses, they usually keep basic records of documents issued and payments received, just to a simpler extent.
It is important to stress that even if the entrepreneur does not keep tax records or accounts, the general obligations regarding the retention of documents and contracts still apply. Invoices, receipts, bank statements or contracts need to be kept for the statutory period of time as they may be needed for tax audits.
Imagine that in December 2025 you issue an invoice to a customer for CZK 100,000 for a service that you have already delivered in full. However, the customer will not pay until January 2026.
In your tax records, you are only interested in the moment when the money actually arrives in your account. The receipt of the CZK 100,000 will therefore not be recorded until January 2026.
In the accounting, it is decisive when the service was incurred and invoiced. You will book the CZK 100,000 income in December 2025, the period in which you provided the service. Although the balance in the account will not change until January 2026, in the accounts you have already booked the receivable from the customer in December 2025 and the revenue in 2025. The accounts therefore show that you have already “earned” this money in 2025, even though it will not physically arrive until the following year.
In December 2025, your supplier delivers the material and issues an invoice for £50,000. However, you will not pay it until 15 January 2026.
You will not record the expensein your tax records until the time of payment, i.e. 15 January 2026. This expense will not enter the tax base for 2025 and will only appear in full on the 2026 tax return.
You will book the CZK 50,000 expensein your accounts by December 2025, as the material is related to this period. In December, you incur an expense and a liability to the supplier, which remains outstanding until you pay the invoice in January. In 2026, only the payment of the liability will then be recorded in the accounts, not a new expense. From an income statement perspective, the expense is correctly allocated to 2025, even if the money does not leave you until the following year.
In July 2025, a customer sends you an advance of £80,000 for a job that you will not complete and invoice until September 2025.
What mattersin your tax records is that you received the money in July. The advance payment will therefore appear as income in July, which will enter the tax base. Once you issue the final invoice in September, the customer will only pay you the remaining amount. So in summary, you have the full value of the contract in income for 2025 at the points in time when you actually received the money.
In accounting, the advance payment in July is not yet revenue. It is accounted for as an advance received, i.e. a liability to the customer – you effectively ‘owe’ them delivery of the service or goods. It only becomes revenue in September when you complete the job and issue the final invoice. Only then will the accounts recognise the full amount of revenue and also account for the advance received. The result is that the revenue corresponds in time to when you actually provided the service, not when the money ran out.
You have an electronics e-shop. At the end of 2025, you have goods in stock with a purchase price of CZK 400 000.
In the tax records, inventory is reflected “indirectly”. You are mainly interested in the actual purchases of goods (payments to suppliers) during the year, which enter into expenses. However, in order to ensure that the tax records reflect reality, the effects of inventories on the tax base are also dealt with during transitions between regimes (e.g. when switching to accounting). In the current year, however, the tax records do not need a detailed inventory breakdown – it is sufficient that you have separate records of purchases of goods and, where applicable, a physical inventory.
In accounting, inventories play a much more important role. At the end of the year, you need to take an inventory of the stock and, based on the actual stock, book the stock as part of the assets on the balance sheet. Only that part of the purchases of goods that corresponds to the goods sold (cost of goods sold) enters the cost for the year, the rest remains as inventory in the asset. This way, the accounting will more accurately show what your profit is on the sale of goods because it separates the cost of goods sold from those still sitting in the warehouse.
In particular, the law requires you to break it down in such a way that the tax base can be determined and tax-deductible and non-tax expenses can be distinguished. A reasonable breakdown by type of expense (materials, services, travel, wages, etc.) is therefore sufficient for the tax office.
The Accounting Act allows you to choose an accounting period other than the calendar year (the so-called business year). For individuals, however, the tax period is always the calendar year – so you will still calculate income tax for January-December. The financial year is therefore used in practice mainly by limited companies and other legal entities, typically when it suits the seasonality of their business better.
In practice, sales are based on sales for the transactions (goods and services supplied), not only on the payments collected, and VAT payers work with the turnover without tax, while some exempt transactions are also added, which are otherwise not included in the turnover for VAT.
Once you become an accounting entity as a natural person (e.g. by exceeding the turnover of CZK 25 million or by registering in the Commercial Register), you must keep your accounts for at least five consecutive accounting periods – regardless of the fact that your turnover drops in subsequent years.
Deciding whether bookkeeping makes sense for your business or whether tax records are enough is not just a technical choice. It will affect how much time you spend on administration, how much you pay your accountant, what information you have about your business and how the bank or investor sees you. So let’s look at the advantages and disadvantages of both systems in a little more detail:
In summary: tax accounting is great as long as the business is relatively simple and small. But as soon as you want more funding, grow quickly, or have a more complex structure, its limitations become very apparent.
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.
Let’s take a look at when the transition between tax records and accounting is compulsory, when it is voluntary and how it is technically carried out so that the two records are smoothly linked and no unnecessary problems arise with taxes or the authorities.
The question of switching from tax records to accounting comes up when the business is no longer a “small business” but starts to take on larger dimensions. The law says quite precisely when tax records are no longer sufficient and when you become an accounting entity that must keep accounts.
The mandatory transition occurs primarily in two situations:
However, in addition to the mandatory transition, there is also a voluntary transition. You can switch to bookkeeping at any time, even if you do not meet the legal thresholds. You can decide at any time during the year, but the actual transition takes place on the first day of the new accounting period (usually 1 January), not arbitrarily at any time during the year.
The actual transition from tax to accounting is not just a matter of getting a new accounting program and starting to account “from scratch” from 1 January. The accounting has to build seamlessly on what you were doing before, so that it is clear what assets and liabilities you have at the time of transition and what the tax implications are.
When you transfer, you must:
Modern accounting software often uses a “tax-to-accounting bridge” for this process . This is a function or module that allows you to upload data from the tax records (for example, a list of items and their balances) and the program automatically assigns them to the correct accounts in the chart of accounts. The result is a set of opening balances that you then start with in your accounting. Although the program can save a lot of work, you always need someone to check this step.
The opposite direction, i.e. switching from accounting to tax records, is less common in practice, but not impossible. It typically occurs with self-employed persons who have kept accounts voluntarily (e.g. for a bank or internal review) and after a while find that the administration is too demanding for them.
In this case too, the procedure is similar to the one used in the opposite direction – again, adjustments are made to the tax base. However, it is important to note that an entrepreneur who keeps accounts can only stop keeping accounts after the statutory conditions have been met – in particular after a certain minimum period of keeping accounts (5 consecutive accounting periods).
Tax accounting is a more practical and cheaper solution for smaller and simpler trades – you mainly keep track of actual income received and expenses paid, the tax base is based on the movement of money and you can often handle the administration yourself. Accounting, on the other hand, is a complex system with double entry and the accrual principle, which gives a truer picture of the assets, liabilities, profits and financial health of the business. While most LLCs and sole proprietorships registered in the commercial register or with a turnover of over 25 million must keep accounts, other sole proprietors can choose between tax registration, flat expenses or flat tax – where the formal obligation to keep tax records is abolished, but the obligation to prove income and keep documents remains.
The choice between tax records and bookkeeping is therefore not just a question of paperwork, but more importantly the size and ambition of your business. If you have a simple business without a lot of credit, inventory and employees, tax records or a flat rate will typically suffice. But as turnover grows, assets, liabilities and employees increase, and you need to deal with a bank or investors, it starts to make sense to make a voluntary or mandatory switch to bookkeeping – ideally using a conversion bridge and careful inventory. Whichever scheme you choose, always remember that you must keep key documents, contracts and accounting or tax records for the legally required period of time, as these are your insurance policy in the event of an audit.
The signal is usually a combination of factors: rapid growth in turnover (e.g. over CZK 10-15 million per year), more employees, loans and leases, larger inventory and bank or investor requirements for financial statements. If, when managing a company, you feel that a simple income and expense table is not enough and you often hunt for information in different files, this is a typical moment when accounting starts to make sense even voluntarily.
If you know that within 1-2 years you want to set up an LLC and invest part or all of the business in it, it is often advantageous to switch to accounting as a self-employed person. This will make it easier for you to value assets, transfer inventory, record receivables and payables and then set up accounting in the company.
The transition itself is not formally notified to the tax office – it is reflected in the way you prepare your tax return and what statements you attach (in the case of accounting, it is already the financial statements).
Even after you close your business, you must continue to keep the documents for the statutory period. In the case of accounting entities, the financial statements and annual report must be kept for 10 years, and other accounting documents, books, inventories and summaries for at least 5 years from the end of the period to which they relate. For sole proprietors keeping only tax records, the minimum time limits are based on tax regulations – generally a minimum of 3 years is stated, but in practice we recommend keeping documents for at least 10 years due to limitation periods, possible additional audits or disputes (e.g. with employees or customers).
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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