Financial Accounting

Introduction to German GAAP with exercises

Robert Nothhelfer

• Publisher: De Gruyter
• Year: 2022
• eBook ISBN: 9783110744248
• Edition: 2
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

Every German student of business administration needs to have a basic understanding of accounting according to German GAAP. Thanks to globalization, many courses in German accounting are nowadays conducted in English. In addition, many foreign subsidiaries of German companies have to prepare their part of consolidated financial statements according to German GAAP. So far students taking these accounting courses and professionals preparing these financial statements have had to rely on German literature only and did not have an English textbook to refer to that covers German GAAP accounting topics in detail.

To fill this gap, the first edition of this book offered a compact introduction to financial statements according to German GAAP, and exercises on individual topics with solutions and case studies for in-depth and effective learning. The revised and extended second edition with updated references and text, adds a complete translation of the parts of the German Commercial Code that are directly relevant for accounting. Students and professionals can now go back to the original source when working out accounting problems. It provides ideal support for German-speaking students and is furthermore valuable for professionals looking for explanations when preparing the data for consolidated financial statements.

• Includes exercises and case studies for practice
• Ideal textbook for students of German universities attending English-speaking lectures in financial management
• Ideal introduction for professionals with succinct explanations and additional support in the form of a glossary and list of vocabulary terms

Part I: Financial statements according to German GAAP

1 Introduction to accounting

Why is accounting necessary? Many students and professionals consider it boring, tedious, complex, or worse. So many laws and regulations, so many principles and methods – all sound similar, but are different. Why bother?

Imagine a businessman running a small business. He has no employees; he just works on his own. In a market economy, a business provides goods or services for other people, typically customers who pay for them. On the other hand, the businessman runs the business to provide a cash flow to cover his living expenses. When the businessman looks for new customers, an important question arises: What price should he charge for his goods or services? There are two perspectives on this question. The first is the marketing perspective and asks the question: How much are customers willing to pay? This is an important issue, but it is not the focus here. The other perspective is connected to the issue of how much does he need to charge to cover his business costs and to earn a decent living? Put another way: What living standard can he afford with this business?

The core intention of accounting is to answer these questions, to provide information about the financial performance of a business to its owners (or to management, if they are not the same). Other intentions have evolved over time.¹

1.1 Purpose of accounting

1.1.1 The fundamental question and the fundamental equation

As mentioned earlier, the original purpose of accounting was to inform business owners about their financial performance. But what does financial performance mean? Financial performance means the value of the business that is available to the owner, which is usually money that can be spent by the owner, but it can also be in other forms of goods or rights.

But our businessman has more than just a bank account with a positive balance. Let us assume he provides consulting services for companies. For that he needs some equipment, so he buys some assets for example a computer, a mobile phone, and some software. He rents office space and buys some office furniture. Thus, he spends money and acquires other assets that have value. Perhaps one of his suppliers does not ask for cash payment but offers credit, which the businessman takes advantage of. Then he acquires some asset; he does not lose money (at least for now) but he does have a liability: He will eventually have to pay a certain amount of money to settle his purchase.

This leads to the following fundamental accounting equation:²

$\mathrm{N}\mathrm{e}\mathrm{t}\mathrm{A}\mathrm{s}\mathrm{s}\mathrm{e}\mathrm{t}\mathrm{s}=\mathrm{A}\mathrm{s}\mathrm{s}\mathrm{e}\mathrm{t}\mathrm{s}-\mathrm{L}\mathrm{i}\mathrm{a}\mathrm{b}\mathrm{i}\mathrm{l}\mathrm{i}\mathrm{t}\mathrm{i}\mathrm{e}\mathrm{s}$

The value that is available for the businessman are the net assets, that is all valuable items the business owns minus all obligations for future payments the business incurs. In accounting, net assets are also called (owner’s) equity:

$\mathrm{E}\mathrm{q}\mathrm{u}\mathrm{i}\mathrm{t}\mathrm{y}=\mathrm{A}\mathrm{s}\mathrm{s}\mathrm{e}\mathrm{t}\mathrm{s}-\mathrm{L}\mathrm{i}\mathrm{a}\mathrm{b}\mathrm{i}\mathrm{l}\mathrm{i}\mathrm{t}\mathrm{i}\mathrm{e}\mathrm{s}\mathrm{o}\mathrm{r}\mathrm{A}\mathrm{s}\mathrm{s}\mathrm{e}\mathrm{t}\mathrm{s}=\mathrm{E}\mathrm{q}\mathrm{u}\mathrm{i}\mathrm{t}\mathrm{y}+\mathrm{L}\mathrm{i}\mathrm{a}\mathrm{b}\mathrm{i}\mathrm{l}\mathrm{i}\mathrm{t}\mathrm{i}\mathrm{e}\mathrm{s}$

This fundamental equation gives the first important information to the owner of the business, and it must be satisfied all the time at a specific point in time; we return to this point later on.

Another important piece of information is change in equity. To analyze a change in equity, we need to look at a specific time period: At the beginning of this period there is a starting value, and at the end there is an ending value. If the ending value is higher than the starting value, equity increased; this is called profit because the value of the business increased. If the ending value is lower than the starting value, then equity decreased; this is called a loss.³

Example

The aforementioned businessman starts his business with €10,000 in cash. He purchases office equipment for a total of €6,000. Part of it, €4,000, he pays in cash; part of it, €2,000, he buys on credit. He provides services for €24,000, which is paid in cash, and has current expenses for rent and other items of €8,000, which he pays for in cash as well.

What is his financial position at the end of this period?

At the beginning, his equity stake in the business comes to €10,000.

Thus, we sum up his assets as follows (all figures in Euros):

Cash at the beginning	10,000
− purchases in cash	− 4,000
− current expenses	− 8,000
+ cash from services	24,000
= cash at end	22,000
+ purchased assets	6,000
= total assets	28,000

Applying the fundamental accounting equati...

Table of contents

• Title Page
• Copyright
• Contents
• Abbreviations
• Part I: Financial statements according to German GAAP
• Part II: Exercises The following exercises are mainly fromNothhelfer/Bacher/Rade/Scholz, Klausurtraining für Bilanzierung und Finanzwirtschaft, 1st edition, De Gruyter Oldenbourg, Berlin, 2015
• Part III: Additional information
• 9 Glossary
• 10 Vocabulary
• Index