Glossary Profit Determination Method

Method of profit determination refers to the legally prescribed method by which entrepreneurs and self-employed professionals determine their taxable profit. In Germany a distinction is generally made between the simplified income-surplus calculation (EÜR) and balance sheet accounting (comparison of business assets). The choice of profit determination method affects bookkeeping obligations, tax planning options and the presentation of your company’s financial position.

Overview of common methods of profit determination

Two procedures are particularly relevant in practice:

• Income-surplus calculation (EÜR): A simplified form of profit determination based on the income and expenses of a calendar or fiscal year. Legal basis includes, among others, § 4 para. 3 EStG. Commonly used by freelancers and small sole proprietors.
• Balance sheet accounting / comparison of business assets: Profit results from the difference between business assets at the end and the beginning of the year, taking withdrawals and contributions into account. The basis is commercial law provisions (§§ 238 ff. HGB) and tax law, which often makes the commercial balance sheet decisive.

When which method applies

Whether you must apply the EÜR or balance sheet accounting depends on your legal form, your merchant status under the HGB and statutory thresholds. Freelancers and smaller traders can generally use the EÜR, provided they are not required to keep accounts. Merchants under the HGB are obliged to use double-entry bookkeeping and balance sheet accounting.

Important: the choice is relevant for both tax and commercial law. A later change of profit determination method can trigger reporting obligations and transitional rules. Therefore, check the effects on depreciations, provisions and the commercial publication requirements before switching.

Advantages and disadvantages in business practice

Einnahmenüberschussrechnung (EÜR)

• Advantages: Easy to handle, lower administrative effort, low ongoing costs.
• Disadvantages: Less transparency for banks and business partners, limited options for tax planning (e.g. with provisions).

Bilanzierung

• Advantages: More accurate representation of assets and liabilities, better basis for investment decisions and external financing, tax recognition of provisions and partial write-downs.
• Disadvantages: Higher effort, obligation to observe commercial and tax valuation rules, sometimes costs for tax advisors and annual audits.

Practical guidance and concrete examples

How to choose the appropriate profit determination method:

1. Check your legal form and whether you are considered a merchant under the HGB. Merchant status generally entails an obligation to prepare balance sheets.
2. Assess your business needs: Do you need a meaningful balance sheet for loan applications or investors? If so, balance sheet accounting is advantageous.
3. Consider tax effects: For example, balance sheet accounting allows the recognition of provisions, which can affect taxable income.

Concrete example 1: You are a freelance web developer working alone. Your revenues are modest and you do not need bank financing. The EÜR is usually sufficient here and saves time.

Concrete example 2: You run a growing trading business as a sole proprietor and want to take out loans. The bank requires a balance sheet. In this case double-entry bookkeeping is sensible because it presents the company’s financial position more transparently.

Practical procedures and forms

For the EÜR you generally use the EÜR schedule as part of the income tax return. For balance sheet accounting you prepare an annual financial statement (balance sheet and profit and loss account) according to the HGB and, if applicable, submit the tax balance sheet. Note the differences in valuation and recognition between the commercial and tax balance sheet (principle of commercial-law relevance).

Practical tips:

• Maintain clear document organisation, regardless of the method chosen.
• Have complex matters (e.g. leasing, provisions, deferred taxes) reviewed by a tax advisor.
• Document any change of profit determination method in writing and coordinate it with the tax office.

Conclusion: The right method of profit determination depends on your company form, the scale of your business activities and your financial objectives. Make the decision deliberately and consult a tax advisor if in doubt to avoid tax risks.