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Bookkeeping Basics - Financial Accounting

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Accounting duties

Financial accounting primarily fulfills the task of documentation. All business transactions are recorded on the basis of documents. The determination of the status of the assets and debts, the recording of the changes in the asset and debt values ​​as well as the determination of success are other important tasks. In addition, the financial accounting serves to inform the entrepreneur, account for shareholders, protect creditors and as evidence in litigation and as evidence of the tax bases.
More information on the tasks of bookkeeping.

Bookkeeping

Bookkeeping regulations can be found in commercial and tax law. According to Section 238, Paragraph 1 of the German Commercial Code, every merchant is obliged to keep books.

According to tax law, all entrepreneurs who are obliged to keep accounts according to Section 238 of the German Commercial Code (HGB) are initially obliged to keep accounts. One speaks of the derived accounting obligation according to § 140 Tax Code.

According to § 141 Tax Code, the accounting obligation also arises when the following limits are exceeded (for fiscal years beginning after December 31, 2015):

  1. Sales 600,000 euros in the calendar year or
  2. Self-managed agricultural and forestry areas with an economic value (Section 46 of the Assessment Act) of more than 25,000 euros or
  3. Profit from commercial operations of more than 60,000 euros in the financial year or
  4. Profit from agriculture and forestry of more than 60,000 euros in a calendar year.

One speaks of an original accounting obligation. The boundaries are subject to frequent adjustments.

Freelancers (e.g. lawyers, tax consultants or doctors) are generally not required to keep accounts. The exact delimitation can be found in § 18 EStG (income from self-employed work). These persons can also determine their profit in accordance with the income surplus calculation if the stated limits are exceeded.
Further information on accounting requirements.

Principles of proper accounting (GoB)

The requirements for bookkeeping and their records result from § 238 HGB and § 145 Tax Code. According to this, the bookkeeping must be such that it can provide an expert third party with an overview of the business transactions and the situation of the company within a reasonable period of time. The business transactions must also be traceable in their development and processing. The records must be made in such a way that the purpose for which they are intended for taxation is achieved. No posting may be made without a receipt.
Further information on the principles of proper bookkeeping and the retention requirements.

Inventory, inventory and balance

The inventory of all assets and debts of a company in terms of quantity and value at a specific point in time is called an inventory.

The assets and debts determined by the inventory are summarized in an inventory, the inventory (list form).

The company's equity is obtained by subtracting the debt from the assets.

The inventory forms the basis for the balance sheet. The balance sheet is a short version of the inventory in the form of accounts without any quantities.

Both sides of the balance sheet must be balanced. The Italian word bilancia means scales (beam scales). The Latin word bilanx means double scales.

Balance sheet
assets liabilities
This page provides information about the types of assets and the asset structure of the company. This page provides information about the sources of wealth and the capital structure of the company.
Here you can see the use of funds and investments by the company.So here you can see the source of funds or financing of the company.
This page is divided into:
- Fixed assets and
- current assets
This page is divided into:
- Equity and
- borrowed capital
This page is arranged according to the liquid (liquidability).This page is sorted by maturity.
Simply put, this is what is in the store.To put it simply, it says who the store actually belongs to.

The further structure of the balance sheet depends on the legal form and size of the company.
Further information on the inventory, the inventory and the balance sheet.

Business transactions

The asset and capital structure of a company is constantly changing due to economic and legal processes. These processes are known as business transactions.

Section 238 (1) of the German Commercial Code (HGB):

Every merchant is obliged to keep books and to make his commercial transactions and the position of his assets visible in these according to the principles of proper bookkeeping. The bookkeeping must be such that it can give an expert third party an overview of the business transactions and the situation of the company within a reasonable period of time. The business transactions must be traceable in their development and processing.

§ 145 Paragraph 1 Tax Code:

The bookkeeping must be such that it can provide an expert third party with an overview of the business transactions and the situation of the company within a reasonable period of time. The business transactions must be traceable in their development and processing.

Business transactions can be divided into inventory-effective and income-effective. The business transactions posted to the inventory accounts do not change the equity. The majority of the business transactions that occur, however, influence the result and thus determine profit or loss. Since the expense accounts and income accounts change the equity and thus make success processes visible, these accounts are called success accounts.

Changes in value (changes in inventory) on the balance sheet

Since every business transaction changes at least two items on the balance sheet, there are 4 ways of changing the value.

  1. Asset swap (only affects the assets side, total assets do not change, e.g. the purchase of a computer with cash payment)
  2. Liability swap (only affects the liabilities side, total assets do not change, e.g. conversion of a short-term into a long-term liability)
  3. Asset-liability increase (affects both sides of the balance sheet, total assets increase, e.g. the purchase of a computer on target)
  4. Asset / liability reduction (affects both sides of the balance sheet, balance sheet total becomes smaller, e.g. payment of the computer purchased on target by bank transfer)

The balance of the balance sheet sides (balance equation) is retained for all changes in value.
Further information on changes in value.

Accounts

In practice, the changes are recorded (posted) to accounts. The accounts that record the stocks on the balance sheet are called stock accounts. These are divided into active accounts (stocks on the assets side) and passive accounts (stocks on the liabilities side). Like the balance sheet, the accounts have two sides. The left side is called debit and the right side is called credit. These two terms mean nothing else, they could also be interchanged with left and right.

Inventory accounts

Inventory accounts
Active accounts Passive accounts
ShouldTo have Should To have
Opening balanceReductionsReductionsOpening balance
IncreasesClosing stockClosing stockIncreases

Principles for inventory accounts:

  1. The opening balance is always on the side of the account on which the account appears on the balance sheet.
  2. Increases (receipts) are on the side of the opening balance because they increase the opening balance.
  3. Reductions (disposals) are on the opposite side of the opening balance because they reduce it.
  4. The closing balance (balance) is on the side of the reductions, since the reductions can never be greater than the opening balance and increases combined.
  5. Closing balance = opening balance + increases - decreases

More information about the inventory accounts.

The posting record

Every business transaction generates at least one debit posting and one credit posting. So he changes at least 2 accounts. The posting record specifies the accounts to which a business transaction is to be posted.

One also speaks of double-entry bookkeeping, because every business transaction is recorded in two ways. Exactly the same value is posted in debit and credit.

There are rules for creating a booking record from a business transaction:

  1. Which accounts does the business transaction affect?
  2. What kind of accounts are they? Active accounts, passive accounts, (expense and income accounts are added later to differentiate)
  3. Is there an increase or a decrease in the corresponding account?
  4. Determine from point 3 on which side of the account (debit or credit) is to be posted!
  5. Form the booking record! The debit account is mentioned first and the credit account last. Both accounts are connected with "on".
    So: debit account to credit account

The word "an" has no other meaning. It would also be interchangeable with "to" or some other word. It becomes problematic for beginners if, in the sense of the word logic, they suspect a directional indication after "an". Bank to cash does not mean that the money is deposited into the cash register. Bank in debit and cash posted in credit means that the bank increases and the cash balance decreases.

If more than two accounts are involved in a business transaction, a composite posting record is required.

The following applies to simple and compound booking records:
Sum of debit posting (s) = sum of credit posting (s)
More information about the booking rate.

Success accounts

The success of the company becomes visible in the change in equity. The business transactions that lead to a change in equity are recorded in profit and loss accounts. Equity is reduced by expenses (expense accounts) and increases by income (income accounts). Success accounts are therefore sub-accounts of equity.

Success accounts
Expense accounts Income accounts
ShouldTo have  ShouldTo have
expenditure  Yield
Booking on target
like on the passive stock account equity,
because effort represents a reduction
balance balance Booking in credit
like on the passive stock account equity,
because yield represents an increase

Success accounts are concluded via the profit and loss account (P&L) and this then via the equity account.

Booking rates:
P&L account to expense accounts
Income accounts to income statement account

Profit or loss on the income statement
Income statement Income statement
ShouldTo have ShouldTo have
expenditureIncomeexpenditureIncome
Profit as a balance
Income is greater than expenses
Loss as balance
Income is less than expenses

Booking rates:
Profit (income is greater than expenses): P&L account to equity
Loss (income is less than expenses): Equity to income statement account

Profit or loss on equity account
Equity Equity
ShouldTo have ShouldTo have
Closing stockOpening balanceLoss (reduces equity)Opening balance
Profit (increases equity)Closing stock

More information on profit and loss accounts, equity accounts and profit and loss accounts.

G / L accounts and personal accounts

The inventory accounts and the profit accounts are called G / L accounts.

In practice, trade receivables and trade payables are not posted directly to the inventory accounts. Personal accounts are introduced. For receivables these are the accounts receivable and for liabilities the accounts payable.

Accounts
G / L accounts Personal accounts
Inventory accountsSuccess accounts Customer accounts (debtors)Supplier accounts (vendors)
Active inventory accountsPassive inventory accountsExpense accountsIncome accounts
Sub-accounts of the passive inventory account equitySub-accounts of the active inventory account ReceivablesSub-accounts of the passive stock account Liabilities

More information about general ledger accounts and personal accounts.

Chart of accounts and chart of accounts

The chart of accounts ensures the order and clarity of the accounts. It divides the accounts into account classes and then divides them into account groups. A further subdivision is made into account type and account sub-type. Each account is given a number, which simplifies bookings. The company uses the chart of accounts to develop its chart of accounts.

Structure of the industry chart of accounts (ICR) as an example:

Account class
0 Inventory accounts Active inventory accounts Capital assets
1
2 Current assets
3 Passive inventory accounts Equity and provisions
4 liabilities
5 Success accounts Income accounts Income
6 Expense accounts Operating expenses
7 Other expenses
8 Profitability Analysis
9 Cost and performance accounting

Inventory and profit accounts each form a separate group of accounts in financial accounting. The link between the two groups is the passive equity account.

One speaks of double bookkeeping because the annual success is proven in two ways.

  1. By comparing the equity of the current year with that of the previous year in the balance sheet.
  2. By comparing the expenses and income of the current year in the income statement.

More information on the chart of accounts and chart of accounts.

Bookkeeping books

The books of the bookkeeping are the land register (journal), the general ledger (general ledger accounts) and the subsidiary ledgers.

In the land register (journal), the booking records are recorded in chronological order using documents.

Every posting in the land register must be entered in the corresponding general ledger account in the general ledger. When using an accounting program, this happens automatically. The general ledger has a factual order and the land register a temporal order.

Since every business transaction is recorded in two books, one also speaks of double-entry bookkeeping.

Subsidiary ledgers provide more detailed explanations of certain general ledger accounts.

  • Accounts receivable and payable are explained by the current account book,
  • the warehouse and investment files explain certain asset accounts and
  • the payroll department explains the relevant general ledger accounts

Here you will find more information

History of accounting

Our current form of double-entry bookkeeping was developed in Italy (13th and 14th centuries). Double-entry bookkeeping was first described by the Italian mathematician and Franciscan monk Luca Pacioli in a book from 1494.

For Goethe, bookkeeping was one of the most beautiful inventions of the human mind.
In the work "Wilhelm Meister's theatrical broadcast" or later in a shortened edition "Wilhelm Meister's Apprenticeship" we find:

I was just going through our books, and with the ease with which the state of our assets can be overlooked, I again admire the great advantages that double-entry bookkeeping affords the merchant. It is one of the finest inventions of the human mind, and every good household should introduce it into their economy. The order and ease of having everything in front of you, the desire to save and acquire, ...

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