Meaning of Accounting 2
Differentiation between partnerships and corporations
There are significantly more and stricter rules for corporations than for small partnerships. For example, they explicitly exclude voting rights that exist for the rest of the merchants. Likewise, the special provisions of national accounting (HGB) often require more details in the individual reports. Even within the group of corporations there are again gradations in the commercial law obligations. These are based on the sales volume, the balance sheet total and the number of employees.
Since January 1, 2005, capital market-oriented companies have had to prepare their entire annual financial statements in accordance with international accounting standards (IFRS). The above-mentioned option continues to apply to corporations not oriented towards the capital market. Instead of national accounting (HGB financial statements), you can also prepare accounting according to IFRS.
International accounting (IFRS)
The abbreviation “IFRS” stands for “International Financial Reporting Standards”. Put simply, these are international standards and regulations drawn up and formulated by the International Accounting Standards Board (IASB). All of these are intended to harmonize international accounting in companies. The aim is to be able to provide international creditors, shareholders and target groups interested in the company with understandable but also comparable information about the economic and financial situation of a company.
Structure of international accounting and differentiation to accounting according to HGB
In contrast to accounting according to the German Commercial Code (HGB), international accounting is not a self-contained set of rules with generally applicable regulations. The regulations of the IFRS are much more detailed than the provisions set out in the HGB. This large difference can essentially be explained by the fact that international accounting deals with relevant individual issues. This not only results in repetitions, but also in redundant information. All of these points ensure that the total scope has increased enormously since the first execution. The basic structure of international accounting consists of three parts: the framework, the standards and the interpretations.
The so-called framework forms the basis on which the standards and interpretations just mentioned are built. Basically, this means nothing else than that the substantive concretization of individual questions and facts always takes place from the bottom up. So from the framework to the standards to the interpretations. The framework therefore serves as the basis for international accounting. It not only provides general information on the objectives of the IFRS, but also provides relevant information on the design of company financial statements. However, the framework information is not to be regarded as binding.
Compared to the framework, the standards are a little more specific, because they provide both the formal structure to be fulfilled and the presentation for annual financial statements. In particular, the following is regulated: A company must disclose its entire financial and asset position twice a year, at the beginning and at the end of a financial year. In addition, the annual financial statements must reflect the following information:
- The overall success
- Any changes in equity
- Detailed information on cash flows
In addition, the notes to the balance sheet must not only contain information on the accounting and valuation methods used, but also general explanations. To date, international accounting has comprised a total of 36 of the standards just mentioned. All of these deal with a specific accounting problem. In addition to definitions of terms, this also includes discussions of individual regulations.
Last but not least, we would like to dedicate ourselves to the interpretations, because they serve as a supplement to the standards. Basically they are nothing more than their official interpretation.
Worth knowing: Since the beginning of 2005, international accounting (IFRS) has been mandatory for large, capital market-oriented companies and groups. Nevertheless, the conclusion according to the German Commercial Code is required, because this is necessary for the assessment of taxes. In summary, this means that the cost of preparing the annual financial statements of German companies has almost doubled since 2005. Nonetheless, international accounting (IFRS) is viewed quite positively overall, because it contributes to standardization and comparability on an international level.
How do you do the accounting?
The booking of all business transactions forms the basis of the accounting. The principle of double-entry bookkeeping is always applied here. That means: every business transaction is recorded twice. In principle, the same value is posted in debit and credit . All business transactions occurring during the year are listed in the annual financial statements at the end of the year. For this, large companies have to compare all expenses and income in the income statement so that a decent operating result can be determined from this. The balance sheet is then drawn up.
In principle, accounting has three main tasks. This includes the documentation, the distribution of dividends and the provision of information. The documentation function serves as a basic task and results from the fulfillment of the other two tasks. As a result, accounting has the two central tasks of conveying information and measuring dividends. These two purposes are of equal importance to each other. In addition, they pursue an extremely important goal, because they ensure a balanced relationship between the diverging final recipients.
Scope of accounting
The numerous companies are divided into different size classes depending on their total assets, sales and number of employees. Accordingly, the scope of the accounting differs depending on the size class of the respective company. Small corporations, for example, only have to disclose the balance sheet, but not a profit and loss account . In addition, in this case there is no obligation to examine. For large companies and corporations, however, the accounting is much more extensive. Both the balance sheet and the annual financial statements including the notes, management report, proposal for the appropriation of profits and the supervisory board report must be disclosed in full. In addition, the annual financial statements are checked by an auditor.
Annual financial statements
The annual financial statements serve as a detailed summary of important information about the economic condition of a company. Small business owners have it a little easier here, because the income-surplus calculation is sufficient for the annual financial statements. In the annual financial statements, all information is summarized that is created at the end of a company’s financial year. Accordingly, the financial statements provide a brief overview of the financial condition of a company.