Freshers / Beginner level questions & answers
Ques 1. Explain the difference between assets and liabilities.
Assets are resources owned by a company, while liabilities are obligations or debts that a company owes.
Example:
An example of an asset is cash, and a liability could be a bank loan that the company needs to repay.
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Ques 2. Explain the terms 'debit' and 'credit' in accounting.
Debit increases assets and expenses but decreases liabilities and income. Credit increases liabilities and income but decreases assets and expenses.
Example:
Debiting cash account when receiving payment and crediting accounts receivable to show the reduction.
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Ques 3. Define the term 'GAAP.'
GAAP stands for Generally Accepted Accounting Principles, a set of standard guidelines and procedures used in the U.S. to prepare and present financial statements.
Example:
Using consistent accounting methods in financial reporting to ensure comparability.
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Ques 4. Explain the difference between a current asset and a non-current asset.
Current assets are expected to be converted into cash or used up within one year, while non-current assets have a longer useful life.
Example:
Cash and accounts receivable are current assets, while buildings and equipment are non-current assets.
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Ques 5. What is the purpose of the cash basis of accounting?
The cash basis of accounting records revenues and expenses when they are received or paid in cash, rather than when they are incurred or earned.
Example:
If a company receives payment for services in January, it recognizes the revenue in January, irrespective of when the services were provided.
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Ques 6. Explain the concept of 'cost of goods sold' (COGS).
COGS represents the direct costs associated with producing goods or services sold by a company and includes costs like raw materials, labor, and manufacturing overhead.
Example:
If a company sells 1,000 units at $50 each with a total production cost of $30 per unit, the COGS is $30,000.
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Intermediate / 1 to 5 years experienced level questions & answers
Ques 7. What is accrual accounting?
Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid.
Example:
An example of accrual accounting is recognizing revenue when a sale is made, even if the payment is received later.
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Ques 8. What is the purpose of the trial balance?
The trial balance is used to ensure that the total debits equal the total credits in the accounting records.
Example:
If the trial balance doesn't balance, it indicates errors in the accounting entries.
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Ques 9. What is the purpose of the cash flow statement?
The cash flow statement shows the inflow and outflow of cash from operating, investing, and financing activities, providing insights into a company's liquidity and financial health.
Example:
A positive cash flow from operating activities indicates the company is generating cash from its core operations.
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Ques 10. What is the difference between financial accounting and managerial accounting?
Financial accounting focuses on external reporting to investors and regulators, while managerial accounting is for internal decision-making within the company.
Example:
Preparing financial statements for shareholders is an aspect of financial accounting, while budgeting is part of managerial accounting.
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Ques 11. What is the purpose of the income statement?
The income statement shows a company's revenues and expenses over a specific period, resulting in net income or loss.
Example:
Revenue of $50,000 and expenses of $30,000 lead to a net income of $20,000.
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Ques 12. What is the matching principle in accounting?
The matching principle states that expenses should be recognized in the same period as the related revenues they help to generate.
Example:
If a company sells products in December, the associated costs of producing those products should also be recorded in December.
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Ques 13. What is the role of the Sarbanes-Oxley Act in accounting?
The Sarbanes-Oxley Act was enacted to improve corporate governance and financial reporting transparency to protect investors from fraudulent activities.
Example:
Companies are required to establish and maintain internal controls and submit accurate financial reports to regulatory authorities.
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Ques 14. What is the role of a journal entry in the accounting process?
A journal entry is the first step in the accounting cycle, recording financial transactions in chronological order before they are transferred to the general ledger.
Example:
A sale of goods on credit would involve a journal entry debiting accounts receivable and crediting sales revenue.
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Ques 15. Explain the concept of double-entry accounting.
Double-entry accounting means that every transaction has equal and opposite effects, with debits and credits always balancing.
Example:
If a company borrows $10,000 from a bank, it records a debit to cash (increasing assets) and a credit to liabilities (increasing debt).
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Ques 16. What is the purpose of a bank reconciliation statement?
A bank reconciliation statement is prepared to ensure that the company's records match the bank's records, identifying any discrepancies that need to be resolved.
Example:
If a check issued by the company is not yet cleared by the bank, it will result in a reconciling item.
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Ques 17. What is the significance of the debt-to-equity ratio?
The debt-to-equity ratio measures the proportion of a company's debt to its equity, indicating the level of financial leverage and risk.
Example:
A debt-to-equity ratio of 0.5 means that the company has $0.50 in debt for every $1 in equity.
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Ques 18. Explain the term 'inventory turnover ratio.'
The inventory turnover ratio measures how efficiently a company manages its inventory by dividing the cost of goods sold by the average inventory during a specific period.
Example:
If the cost of goods sold is $500,000, and the average inventory is $100,000, the inventory turnover ratio is 5 times.
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Ques 19. What is the difference between a trial balance and a balance sheet?
A trial balance is a list of all ledger account balances to ensure debits equal credits, while a balance sheet summarizes a company's assets, liabilities, and equity at a specific point in time.
Example:
The trial balance may identify errors, and once corrected, the balanced figures transfer to the balance sheet.
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Ques 20. Define 'book value' in accounting.
Book value is the net asset value of a company, calculated by subtracting total liabilities from total assets, providing a measure of shareholders' equity.
Example:
If a company has total assets of $1 million and total liabilities of $500,000, the book value is $500,000.
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Ques 21. What is the difference between a debit note and a credit note?
A debit note is issued to request additional payment from a customer, while a credit note is issued to provide a refund or adjustment for overpayment.
Example:
If a customer underpaid an invoice, the company issues a debit note to collect the remaining amount.
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Ques 22. What is the purpose of the statement of retained earnings?
The statement of retained earnings shows changes in retained earnings over a specific period, including net income or loss and dividends paid to shareholders.
Example:
If a company has net income of $100,000 and pays dividends of $20,000, the retained earnings increase by $80,000.
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Ques 23. Define 'internal controls' in accounting.
Internal controls are processes and procedures implemented by a company to safeguard its assets, ensure accuracy in financial reporting, and promote operational efficiency.
Example:
Requiring dual approval for significant financial transactions is an internal control measure.
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Experienced / Expert level questions & answers
Ques 24. Define depreciation and its methods.
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. Methods include straight-line, declining balance, and units of production.
Example:
If a machine costs $10,000 and has a useful life of 5 years, the annual straight-line depreciation is $2,000.
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Ques 25. Explain the concept of goodwill in accounting.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.
Example:
If a company is acquired for $1 million, and the fair value of its assets is $800,000, the goodwill is $200,000.
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Ques 26. Define the term 'EBITDA.'
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, representing a company's operating performance without certain non-operating expenses.
Example:
If a company has revenue of $500,000, expenses of $300,000, and depreciation of $50,000, the EBITDA is $250,000.
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Ques 27. Define the term 'amortization' in accounting.
Amortization is the process of allocating the cost of intangible assets over their useful life, similar to depreciation for tangible assets.
Example:
If a company acquires a patent for $50,000 with a useful life of 10 years, the annual amortization expense is $5,000.
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Ques 28. Explain the concept of 'materiality' in accounting.
Materiality refers to the significance or importance of financial information, guiding accountants in determining what information to disclose or omit.
Example:
A small accounting error may be considered immaterial, while a large error impacting financial statements is material.
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Ques 29. Explain the concept of 'consistency' in accounting.
Consistency requires a company to use the same accounting principles and methods from one period to the next, ensuring comparability of financial statements.
Example:
If a company changes its depreciation method, it should disclose the change and its impact on financial statements.
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Ques 30. What is the significance of the quick ratio?
The quick ratio measures a company's ability to meet short-term obligations using its most liquid assets (excluding inventory) and is calculated by dividing quick assets by current liabilities.
Example:
If a company has quick assets of $200,000 and current liabilities of $100,000, the quick ratio is 2.
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