Accounting Interview Questions and Answers
Intermediate / 1 to 5 years experienced level questions & answers
Ques 1. 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.
Ques 2. 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.
Ques 3. 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.
Ques 4. 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.
Ques 5. 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.
Ques 6. 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.
Ques 7. 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.
Ques 8. 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.
Ques 9. 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).
Ques 10. 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.
Ques 11. 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.
Ques 12. 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.
Ques 13. 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.
Ques 14. 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.
Ques 15. 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.
Ques 16. 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.
Ques 17. 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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