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1.3 Describe Typical Accounting Activities and the Role Accountants Play

The Accounting Cycle​

Accounting involves a systematic process called the accounting cycle. In Luxembourg, this process must follow PCN standards and legal requirements.

Step 1: Identify Transactions​

Accountants identify economic events that affect the business and can be measured in monetary terms.

Examples:

  • Sale of goods or services
  • Purchase of inventory
  • Payment of salaries
  • Receipt of loan
  • Payment of rent

Luxembourg Context: All transactions must be supported by proper documentation (invoices, receipts, bank statements) for audit purposes and compliance with the 10-year document retention requirement.

Step 2: Record Transactions​

Transactions are recorded in chronological order in a journal using journal entries. Each entry follows the double-entry bookkeeping system.

Example Journal Entry:

Date: 2024-11-19
Debit:  512000 Bank (Cetrel)          €103.00
Credit: 701000 Sales Revenue          €100.00
Credit: 430000 VAT Payable (3%)        €3.00
Description: Restaurant sale, dine-in, paid by card

Step 3: Post to Ledger​

Journal entries are transferred (posted) to individual ledger accounts in the general ledger. Each account shows all transactions affecting that account.

Step 4: Prepare Trial Balance​

A trial balance lists all accounts and their balances to verify that total debits equal total credits. This ensures the accounting equation is balanced.

Step 5: Make Adjusting Entries​

At the end of each period, adjusting entries are made to record:

  • Accrued expenses (expenses incurred but not yet paid)
  • Prepaid expenses (expenses paid in advance)
  • Depreciation
  • VAT accruals

Luxembourg Example: Adjusting entry for VAT payable at month-end:

Debit:  430000 VAT Payable            €1,500.00
Credit: 431000 VAT Recoverable        €1,200.00
Credit: 510000 Bank Account           €300.00
Description: VAT settlement for November

Step 6: Prepare Financial Statements​

Using the adjusted trial balance, accountants prepare:

  • Income Statement
  • Balance Sheet
  • Statement of Cash Flows
  • Notes to Financial Statements

Step 7: Close the Books​

Closing entries transfer balances from temporary accounts (revenue and expense accounts) to permanent accounts (equity accounts).

Roles of Accountants in Luxembourg​

Fiduciaire (Licensed Accounting Firm)​

Fiduciaires are licensed accounting firms in Luxembourg that provide:

  • Bookkeeping services
  • Financial statement preparation
  • Tax preparation and filing
  • Business advisory services
  • Compliance assistance

Requirements:

  • Must be licensed by the Ministry of Justice
  • Must follow professional standards
  • Must maintain professional liability insurance

Expert-Comptable (Certified Public Accountant)​

Experts-comptables are certified public accountants who:

  • Prepare and review financial statements
  • Conduct audits (for larger companies)
  • Provide tax planning and compliance
  • Offer business consulting

Requirements:

  • Must be member of Ordre des Experts-Comptables (OEC)
  • Must complete professional education and training
  • Must pass certification exams
  • Must maintain continuing education

In-House Accountant​

Many Luxembourg SMEs employ in-house accountants who:

  • Maintain daily accounting records
  • Process transactions
  • Prepare internal reports
  • Assist with compliance

Luxembourg Compliance Note​

In Luxembourg, businesses can choose to:

  1. Handle accounting internally (if they have qualified staff)
  2. Outsource to a fiduciaire
  3. Use a combination of both

However, all businesses must ensure their accounting complies with PCN standards and legal requirements, regardless of who performs the work.