What is lack of capital in accounting

Accounting standards: national and international requirements

Companies that have a direct controlling influence on at least one other company - one speaks of a parent-subsidiary relationship - also have their economic and financial situation within the framework of a Consolidated financial statements to disclose. This does not apply to parent companies whose total assets, sales or average number of employees on the balance sheet date fall below the statutory thresholds of Section 293 of the German Commercial Code.

Accounting requirements for sole traders, companies and groups of companies are motivated by three basic interests: Bankruptcy protection, Shareholder protection and Tax structuring.

As Instruments of bankruptcy protection systematic, complete and chronological bookkeeping as well as legally regulated disclosure in the form of annual financial statements are used. This is intended to provide a company's creditors with all the information they need to make credit decisions. In this way, lenders can find out about developments that could lead to a possible default in their claims or the debtor's bankruptcy.

Capital market-oriented companies are also obliged to protect the interests of their investors. Another aim of the annual financial statements is therefore, within the framework of the Shareholder protection principle to give an objective insight into the economic situation of a company so that shareholders can assess possible returns and risks. This is done both in the annual financial statements and in a management report. In addition, trading books and financial statements serve as Instrument of tax planning and tax optimization.

Creditor protection, shareholder protection and tax structuring are reflected in two basic functions of the annual financial statements: in the Payment measurement function and in the Information function.

  • Payment measurement function: An arithmetical closing of the financial year serves as the basis for the taxation of a company as well as for the determination of profit-related distributions (dividends and profit-sharing).
  • Information function: The annual financial statements and management report document the economic and financial situation of a company and serve as a planning basis for the addressees.

While the annual financial statements meet both objectives under German law, the consolidated financial statements only have an information function.

However, annual and consolidated financial statements are only reliable and meaningful if bookkeeping and accounting are subject to uniform principles - so-called accounting standards.