Bookkeeping

Question 1

Merchant (classification and duties)

Answer 1

1) 1. By definition : operates a commercial business requiring a formal organisation
2. By voluntary registration : businesses can voluntarily register in the commercial register
3. By legal form : automatically treated as merchants (commercial company/partnerships - AG, KG, SG, GbR, OHG, GmbH)
4. No merchant :
- Commercial businesses that do not need to be commercially organised due to size/nature (attorneys, doctors or artists)
- Agriculture and Forestry
2) Obligations: have to document all business transactions and financial position. Transactions must be traceable from origin to settlement.
3) Exemptions: - individual merchants
- Revenues < 600.000 + Net profit <60.000 in 2 years (according to §241.a HGB)

Question 2

Business transactions (def)

Answer 2

• Def: a business transaction is an event which changes the company‘s financial situation
  -> the condition of all assets and liabilities
• Has to be expressed in monetary value
• Always has two impacts from a commercial point of view (double-entry bookkeeping)
• The second account is called the Contra Account

Question 3

T Accounts

Answer 3

• Def: A T-account is the graphical representation of a general ledger that records a business’ transactions
• The closing balance is the difference (balance) between the sum of opening balances and the debit/credit side
• Components of a T account :
  1) Debit balance : debit > credit on CREDIT side
  2) Credit balance : credit > debit on DEBIT side
  -> Accounts increase OUTside, decrease INside

Question 4

Types of Accounts

Answer 4

1) Permanent Accounts : all accounts on the company’s balance sheet -> each item associated with a permanent account (assets, liabilities, etc)
2) Temporary Accounts : record transactions affecting net income during reporting period
- Zeroing out : add the balance of the smaller side to the opposite side to zero out. Transfer the result to a permanent account (equity account typically)

Question 5

Vouchers & Journal Entries

Answer 5

1) Journal Entry : instructions to which T-accounts a business transaction has to be posted (also called day book) -> postings made debit to credit
- Simple journal entry : deals with 2 accounts
- Composite journal entry : more than 2 accounts
2) Vouchers : documents containing information about business transactions to be recorded, serve as the basis for journal entries
- Proof that a change in the financial situation has in fact occurred
- No posting without a voucher
- Internal : document from internal operations (e.g.: payrolls, slips, outgoing invoices)
- External : from third-party relationships (e.g.: invoices, receipts, bank statements)

Question 6

Income vs Expense

Answer 6

1) Income: business transactions that increase equity (revenue, sales) -> not always a cash inflow
2) Expenses : business transactions that decrease equity (rent, interest) -> not always cash-outflow
3) Types of transactions :
- Non-affecting income : changes in financial position with no profit impact (profit neutral)
- Affecting income : changes in financial situation with impact on profit (profit affecting), e.g.: sales
- Hybrid transaction : possible to split into a profit-affecting part and a profit neutral part

Question 7

Profit neutral balance changes

Answer 7

1) Asset swap : changes in asset structure without affecting total balance (swap numbers from one asset account to another), e.g.: buying machinery with cash
2) Liabilities swap : change in liabilities structure without affecting total balance (e.g.: converting short-term liabilities into long-term ones)
-> both constant total sum
3) Balance extension : increase on both assets and liabilities sides (e.g.: purchasing inventory on credit)
4) Balance shortening : decrease on both assets and liabilities sides (e.g.: repaying a loan with cash)
-> both change total sum

Question 8

Equity capital account

Answer 8

• Def: The equity capital account reflects changes in equity resulting from :
  1) Investments and withdrawals by the owner : recorded as private account(s)
  -> If the balance is on debit side, equity increases
  2) Gains or losses from business activities : recorded in income/expense account(s)

Question 9

Relevant Standards & Statements

Answer 9

1) Individual FS : mandatory for all german companies
- Individuals + OHG : §§ 238 to 263 HGB
- AG + GmbH (no subsidiary) : §§ 238 to 289f
- GmbH (with subsidiaries) : §§ 238 to 335 HGB
2) Consolidated FS : according to §293, companies with 250<employees and certain revenue have the :
- Option of consolidated accounting (non-capital market oriented companies)
- Obligation of consolidated accounting (capital market oriented companies)