Q1. How many types of business transactions are there in accounting?

Ans.There are two types of business transactions in accounting – revenue and capital.

Q2. Explain real and nominal accounts with examples.

Ans. A real account is an account of assets and liabilities. E.g. land account, building account, etc.
A nominal account is an account of income and expenses. E.g. salary account, wages account, etc.

Q3. Which accounting platforms have you worked on? Which one do you prefer the most?
Ans. Describe the accounting platforms (QuickBooks, Microsoft Dynamic GP, etc.) that you have
worked with and which one you liked the most.

Q4. What is double entry bookkeeping? What are the rules associated with it?
Ans. Double entry bookkeeping is an accounting principle where every debit has a corresponding
credit. Thus, the total debit is always equal to the total credit. In this system, when one account is
debited then another account gets credited at the same time.

Q5. What is working capital?

Ans. Working capital is calculated as current assets minus current liabilities, which is used in day-
to-day trading.

Q6. How do you maintain accounting accuracy?

Ans. Maintaining the accuracy of an organisation’s accounting is an important activity as it can
result in a huge loss. There are various tools and resources which can be used to limit the potential
for errors to creep in and address quickly if any errors do arise.

Q7. What is TDS? Where do you show TDS on a balance sheet?

Ans. TDS (Tax Deducted at Source) is a concept aimed at collecting tax at every source of income.
In a balance sheet, it is shown in the assets section, right after the head current asset.

Q8. What is the difference between ‘accounts payable (AP)’ and ‘accounts receivable (AR)’?
Ans.

Accounts Payable Accounts Receivable

The amount a company owes because it The amount a company has right to collect
purchased goods or services on credit from because it sold goods or services on
a vendor or supplier. credit to a customer.

Accounts payable are liabilities. Accounts receivable are assets.

Q9. What is the difference between a trial balance and a balance sheet?
Ans. A trial balance is the list of all balances in a ledger account and is used to check the arithmetical
accuracy in recording and posting. A balance sheet, on the other hand, is a statement which shows
the assets, liabilities and equity of a company and is used to ascertain its financial position on a
particular date.

Q10. Is it possible for a company to show positive cash flows and still be in grave trouble?
Ans. Yes, if it shows an unsustainable improvement in working capital and involves lack of revenue
going forward in the pipeline.

Q11. What are the common errors in accounting?

Ans. The common errors in accounting are – errors of omission, errors of commission, errors of
principle and compensating error.

Q12. What is the difference between inactive and dormant accounts?

Ans. Inactive accounts are which that are closed and will not be used in the future. Dormant
accounts are not currently functional but may be used in the future.

Q13. Are you familiar with the Accounting Standards? How many accounting standards are there
in India?
Ans. There are currently 41 Accounting Standards which are usually issued by the Accounting
Standards Board (ASB).

Q14. Why do you think Accounting Standards are mandatory?

Ans. Accounting Standards play an important role in preparing a good and accurate financial report.
It ensures reliability and relevance in financial reports.

Also Read>> IFRS vs GAAP: Which is suited for you?

Q15. Have you ever helped your company to save money or use their available financial
resources effectively?
Ans. Explain if you have proposed an idea which has affected the company’s finances positively.
Tell how you have optimised the process and how you came to such a decision through historical
data reviewing.

Q16. If our organisation has three bank accounts for processing payments, what is the minimum
number of ledgers it needs?
Ans.Three ledgers for each account for proper accounting and reconciliation processes.

Q17. What are some of the ways to estimate bad debts?

Ans. Some of the popular ways of estimating bad debts are – percentage of outstanding accounts,
aging analysis and percentage of credit sales.

Q18. What is a deferred tax liability?

Ans. Deferred tax liability signifies that a company may pay more tax in the future due to current
transactions.
 Q19. What is a deferred tax asset and how is the value created?
Ans. A deferred tax asset is when the tax amount has been paid or has been carried forward but
has still not been recognized in the income statement. The value is created by taking the difference
between the book income and the taxable income

Q20. What is the equation for Acid-Test Ratio in accounting?

Ans. The equation for Acid-Test Ratio in accounting
Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities

Q21. What are the popular accounting applications?

Ans. I am familiar with accounting apps like CGram Software, Financial Force, Microsoft Accounting
Professional, Microsoft Dynamics AX and Microsoft Small Business Financials.

Q22. Which accounting application you like the most and why?
Ans. I find Microsoft Accounting Professional the best as it offers reliable and fast processing of
accounting transactions, thereby saving time and increasing proficiency.

Q23. Tell me something about GST.

Ans. GST is the acronym for Goods and Service Tax and it is an indirect tax other than the income
tax. The seller charges it to the customer on the value of the service or product sold. The seller
then deposits the GST to the government.

Q24. What is bank reconciliation statement?

Ans. A bank reconciliation statement or BRS is a form that allows individuals to compare their
personal bank account records to that of the bank. BRS is prepared when the passbook balance
differs from the cashbook balance.

Q25. What is tally accounting?

Ans. It is an accounting software used by small business and shops to manage routine accounting
transactions.

Q26. What are fictitious assets?

Ans. Fictitious assets are intangible assets and their benefit is derived over a longer period, for
example good will, rights, deferred revenue expenditure, miscellaneous expenses, preliminary
expenses, and accumulated loss, among others.

Q27. Can you explain the basic accounting equation?

Ans. Yes, since we know that accounting is all about assets, liabilities and capital. Hence, its
equation can be summarized as:
Assets = Liabilities + Owners Equity.

Q28. What are the different branches of accounting?

Ans. There are three branches of accounting –

• Financial Accounting
• Management Accounting
• Cost Accounting

Q29. What is the meaning of purchase return in accounting?

Ans. As the name suggests, purchase return is a transaction where the buyer of merchandise,
inventory or fixed assets returns these defective or unsatisfactory products back to the seller.

Q30. What is retail banking?

Ans. Retail banking or consumer banking involves a retail client, where individual customers use
local branches of larger commercial banks.

Q31. What is offset accounting?

Ans. Offset accounting is a process of canceling an accounting entry with an equal but opposite
entry. It decreases the net amount of another account to create a net balance.

Q32. What are trade bills?

Ans. These are the bills generated against each transaction. It is a part of documentation procedure
for all types of transactions.

Q33. What is fair value accounting?

Ans. As per fair value accounting, a company has to show the value of all of its assets in terms of
price on balance sheet on which that asset can be sold.

Q34. What happens to the cash, which is collected from the customers but not recorded as
revenue?
Ans. It goes into “Deferred Revenue” on the balance sheet as a liability if no revenue has been
earned yet.

Q35. Why did you choose accounting as your profession?

Ans. I was good at numbers and accounting since my school days, but it was during my 10+2; I
decided to adopt this field as a profession and did Bachelor’s and then Master’s in Accounting.

Q36. What is a MIS report, have you prepared any?

Ans. Yes, I have prepared MIS reports. It is an acronym for Management Information System, and
this report is generated to identify the efficiency of any department of a company.

Q37. What is a company’s payable cycle?

Ans. It is the time required by the company to pay all its account payables.

Q38. What is Scrap Value in accounting?

Ans. Scrap Value is the residual value of an asset that any asset holds after its estimated lifetime.

Q39. Which account is responsible for interest payable?

Ans. Current liability account is responsible for interest payable.
 Going through the above question and answers will probably have given you an idea of the type of
questions that are asked during an accounting interview. These will also help you to freshen up
your accounting knowledge.
Naukri Learning offers a variety of professional online accounting courses which will make you an
expert and improve your chances of acing any accounting interview that you go for.
Also Read>> Top Financial Analyst Interview Questions

Be prepared for some specific accounting interview questions too. Take a look.

Q40. What is departmental accounting system?

It is a type of accounting information system that records all the financial information and activities
of the department. This financial information can be used to check profitability and efficiency of
every department.

Q41. What is a perpetual inventory system?

Perpetual inventory is a methodology that involves recording the sale or purchase of inventory
immediately using enterprise asset management software and computerized point-of-sale
systems.

Q42. What do you mean when you say that you have negative working capital?
When a company’s current liabilities exceed its current assets, it is named as negative working
capital. It is a common terminology in certain industries like retail and restaurant businesses.

Q43. What are the major constraints that can hamper relevant and reliable financial statements?

1. Delay, which leads to irrelevant information

2. No balance between costs and benefits
3. No balance between the qualitative characteristics
4. No clarity in true and fair view presentation

Q44. Tell me the golden rules of accounting, just mention the statements.
There are three golden rules of accounting –

• Debit the receiver, credit the giver

• Debit what comes in, credit what goes out
• Debit all expenses and losses, credit all incomes and gains

Q45. Please elaborate, what this statement means – “Debit the Receiver, Credit the Giver”.
So, this is among the most frequently asked accounting interview questions. Your reply should be
–
This principle is used in the case of personal accounts. If a person is giving any amount either in
cash or by cheque to an organization, it becomes an inflow and thus that person must be credited
in the books of accounts. Therefore, when an organization received the money or cheque, it needs
to credit the person who is paying and debit the organization.
 Q46. Any idea what is ICAI?
Of course, it is the abbreviation of Institute of Chartered Accountants in India.

Q47. What do you mean by premises?

Premises refer to fixed assets presented on a balance sheet.

Q48. What is Executive Accounting?

Executive Accounting is specifically designed for the service-based businesses. This term is popular
in finance, advertising and public relations businesses.

Q49. What are bills receivable?

Bills receivable are the proceeds or payments, which a merchant or a company will be receiving
from its customers.
When replying to accounting interview questions, be very specific and don’t speak up generic stuff.

Q50. Define Balancing.

Balancing means equating or balancing both debit and credit sides of a T-account.

Q51. What is Marginal Cost?

If there is any increase in the number of units produced, the total cost of output is changed.
Marginal cost is that change in the cost of an additional unit of output.

Q52. What are Trade Bills?

Every transaction is documented and the trade bills are those documents, generated against each
transaction.

Q53. Can you define the term Material Facts?

Yes, these are the documents such as vouchers, bills, debit and credit notes, or receipts, etc. They
serve as the base of every account book.

Q54. What are the different stages of Double Entry System?

There are three different stages of double entry system, which are –

• Recording transactions in the accounting systems

• Preparing a trial balance in respective ledger accounts
• Preparing final documents and closing the books of accounts

Q55. What are the disadvantages of a Double Entry System?

• Difficult to find the errors, especially when transactions are recorded in the books
• In case of any error, extensive clerical labor is required
• You can’t disclose all the information of a transaction, which is not properly recorded in the
journal

Q56. What is Assets Minus Liabilities?

 It stands for an owner’s or a stockholder’s equity.

Q57. What is GAAP?

GAAP is the abbreviation for Generally Accepted Accounting Principles (GAAP) issued by the
Institute of Chartered Accountants of India (ICAI) and the provisions of the Companies Act, 1956. It
is a cluster of accounting standards and common industry usage, and it is used by organizations
to:

• Record their financial information properly

• Summarize accounting records into financial statements
• Disclose information whenever required

Q58. Can you tell me some examples for liability accounts?

Some popular examples of liability accounts are –

• Accounts Payable
• Accrued Expenses
• Bonds Payable
• Customer Deposits
• Income Taxes Payable
• Installment Loans Payable
• Interest Payable
• Lawsuits Payable
• Mortgage Loans Payable
• Notes Payable
• Salaries Payable
• Warranty Liability

Q59. What is the difference between accounts receivable and deferred revenue?
Accounts receivable is yet-to be received cash from products or services that are already
sold/delivered to customers, whereas, deferred revenue is the cash received from customers for
services or goods not yet delivered.

Q60. Where should you record a cash discount in journal entry?

A cash discount should be recorded as a reduction of expense in cash account.

#1 Walk me through the three financial statements.

The balance sheet shows a company’s assets, its liabilities, and shareholders’ equity. The income
statement outlines the company’s revenues and expenses. The cash flow statement shows the
cash flows from operating, investing, and financing activities.
#2 If I had only one statement and wanted to review the overall health of a company, which
statement would I use and why?
Cash is king. The cash flow statement gives a true picture of how much cash the company is
generating. That being said, it’s important to note that all three statements truly are required to
get a full picture of the health of a company. Learn more about how the three financial statements
are linked.

#3 What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question. The only impact will be on the balance sheet and cash flow
statement.

#4 What is working capital?

Working capital is typically defined as current assets less current liabilities. In banking, working
capital is normally defined more narrowly as current assets (excluding cash) less current liabilities
(excluding interest-bearing debt).

#5 What does having negative working capital mean?

Negative working capital is common in some industries such as grocery retail and the restaurant
business. For a grocery store, customers pay upfront, inventory moves relatively quickly but
suppliers often give 30 days (or more) credit. This means that the company receives cash from
customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficiency
in businesses with low inventory and accounts receivable. In other industries, negative working
capital may signal a company is facing financial trouble.

#6 If cash collected from customers is not yet recorded as revenue, what happens to it?
It usually goes into “Deferred Revenue” on the balance sheet as a liability if the revenue has not
been earned yet.

#7 What’s the difference between deferred revenue and accounts receivable?

Deferred revenue represents cash received from customers for services or goods not yet provided.
Accounts receivable represents cash owing from customers for goods/services already provided.

#8 When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and depreciated.

#9 Under what circumstances does goodwill increase?

When a company buys another business for more than the fair value of its tangible and intangible
assets, goodwill is created.

#10 How do you record PPE and why is this important?

There are essentially four areas to consider when accounting for PP&E on the balance sheet: initial
purchase, depreciation, additions (capital expenditures), and dispositions. In addition to these four,
you may also have to consider revaluation. For many businesses, PP&E is the main capital asset
that generates revenue, profitability, and cash flow.

#11 How does an inventory write-down affect the three statements?

On the balance sheet, the asset account of inventory is reduced by the amount of the write-down,
and so is shareholders’ equity. The income statement is hit with an expense in either COGS or a
separate line item for the amount of the write-down, reducing net income. On the cash flow
statement, the write-down is added back to CFO as it’s a non-cash expense but must not be double
counted in the changes of non-cash working capital.

#12 What are three examples of common budgeting methods?

Examples of common budgeting methods include zero-based budgeting, incremental budgeting,
and value-based budgeting. Learn more about the various types, in CFI’s budgeting and
forecasting course.

#13 Please explain the Revenue Recognition and Matching principles

The revenue recognition principle dictates the process and timing by which revenue is recorded
and recognized an item in the financial statements based on certain criteria (e.g., transfer of
ownership). The matching principle dictates that the timing of expenses be matched to the period
in which they are incurred, as opposed to when they are actually paid.

#14 If you were CFO of our company, what would keep you up at night?
Step back and give a high-level overview of the company’s current financial position, or companies
in that industry in general. Highlight something on each of the three statements. Income
statement: growth, margins, profitability. Balance sheet: liquidity, capital assets, credit metrics,
liquidity ratios. Cash flow statement: short-term and long-term cash flow profile, any need to raise
money or return capital to shareholders.

Walk me through the three financial statements.

The balance sheet shows a company’s assets, its liabilities, and shareholders’ equity, and is a
snapshot in time. The income statement outlines the company’s revenues and expenses over a
period of time (quarter/year). The cash flow statement shows the cash flows from operating,
investing, and financing activities over a period of time. The three financial statements all fit
together to show a picture of the company’s financial health.

How does an inventory writedown affect the three statements?

This can be one of the more challenging FP&A interview questions. Here is the answer: On the
balance sheet, the asset account of inventory is reduced by the amount of the write-down, and
so is shareholders’ equity. The income statement is hit with an expense in either COGS or a
separate line item for the amount of the writedown, reducing net income. On the cash flow
statement, the writedown is added back to Cash from Operations, as it’s a non-cash expense, but
must not be double counted in the changes of non-cash working capital.

How do you record PP&E and why is this important?

There are essentially four areas to consider when accounting for PP&E on the balance sheet:
initial purchase, depreciation, additions (capital expenditures), and dispositions. In addition to
these four, you may also have to consider revaluation. For many businesses, PP&E is the main
capital asset that generates revenue, profitability, and cash flow.

If you were CFO of our company, what would keep you up at night?
Step back and give a high-level overview of the company’s current financial position, or
companies in that industry in general. Highlight something on each of the three statements.
Income statement: growth, margins, profitability. Balance sheet: liquidity, capital assets, credit
metrics, liquidity ratios. Cash flow statement: short-term and long-term cash flow profile, any
need to raise money or return capital to shareholders. Whatever your answer to this question,
just remember, the main job of the CFO is managing the company’s liquidity in an optimal way,
and earning a rate of return in excess of the company’s cost of capital (WACC).

What does it take to be a great FP&A analyst?

We believe there are three important qualities: analytics, presentation, and soft skills. Check out
our guide on the Analyst Trifecta. for a detailed breakdown of these three skills so you can ace
this question if it comes up in the interview.

FP&A Interview Questions

Name three challenges facing our company.

Same as above question. If asked both questions, pick different points and add some high-level
macro issues such as competition, interest rates, currency and foreign exchange, access to
capital, etc. A well thought out answer will address both internal and external challenges.

What are the hallmarks of a good FP&A financial model?

First off, explain the main objectives of the FP&A department: measuring historical performance,
evaluating future business needs, highlighting issues and strengths in the business, clearly
communicating the most relevant financial information to management, instilling confidence in
the quality of information presented. A good financial model must address all of these and be
simple enough for anyone to understand, yet complex enough to handle all of the necessary
detail of the business.
What’s the difference between budgeting and forecasting?
Budgeting is setting a plan for the future while forecasting is creating an estimate of what will
actually happen. Budgeting is a collaborative process, typically set once per year, and is static
(unless it’s a rolling budget). A forecast is based on incoming data and sets the most probable
expectation of what will transpire, and is typically updated once a quarter.

How do you create a rolling budget or forecast model?

If it’s a monthly rolling forecast, you input the historical data that comes in each month at the
front of the model and extend a forecast out beyond that. When you need to add a new month
to the forecast, it should be at the end of the model. The model “rolls over” every month (or
whatever time period is used) by extending the model out one column. The same approach can
be applied to a quarterly forecast model.

How do you model revenues for a company?

This is one of the most common FP&A interview questions. There are three common ways to
forecast revenues: bottom up, top down, and year over year.

A bottom-up approach to financial modeling involves starting with individual products/services,

estimating average prices/fees per product or service and then growth rates.
A top-down approach involves starting with the overall market size, estimating a company’s
market share, and then translating that into revenue.
A year-over-year approach involves taking last year’s revenue and increasing it or decreasing it
by a certain percentage.
How do you model operating expenses for a company?
You can do a bottom-up build, however, typically, operating expenses move in line with revenues.
As a result, many models forecast operating expenses as a percent of revenues. It’s important to
separate fixed and variable costs and model them appropriately. Fixed costs should only change
in steps (as required), whereas variable costs will be a direct function of revenue.

How do you model working capital for a company?

There are three core components of working capital – accounts receivable, inventories, and
accounts payable. These items are usually modeled to match what is happening with revenues
and cost of sales by using “turns” or “days” ratios (e.g., inventory turns or inventory days). For
example, you could look at the historic relationship between revenues and accounts receivable
by calculating receivable days. Next, you would forecast receivable days – linking it to forecast
revenues.

What are the hallmarks of a good Excel model?

It’s important to have strong financial modeling fundamentals. Wherever possible, model
assumptions (inputs) should be in one place and distinctly colored (bank models typically use a
blue font for model inputs). Good Excel models also make it easy for users to understand how
inputs are translated into outputs. Good Excel models also include error checks to ensure the
model is working correctly (e.g., the balance sheet balances, the cash flow calculations are
correct, etc.).

What makes a “good” budget?

This is one of the somewhat subjective FP&A interview questions. In our opinion, a good budget
is one that has buy-in from all departments in the company (if possible), is realistic, yet strives for
achievement, has been risk-adjusted to allow for a margin of error, and is tied into the company’s
overall strategic plan.
Walk me through the three financial statements.
The balance sheet shows a company’s assets, its liabilities, and shareholders’ equity (put another
way: what it owns, what it owes, and its net worth). The income statement outlines the
company’s revenues, expenses, and net income. The cash flow statement shows cash inflows
and outflows from three areas: operating activities, investing activities, and financing activities.

If I could use only one statement to review the overall health of a company, which statement
would I use and why?
Cash is king. The statement of cash flows gives a true picture of how much cash the company is
generating. Ironically, it often gets the least attention. You can probably pick a different answer
for this question, but you need to provide a good justification (e.g. the balance sheet because
assets are the true driver of cash flow; or the income statement because it shows the earning
power and profitability of a company on a smoothed out accrual basis).

If it were up to you, what would our company’s budgeting process look like?
This is somewhat subjective. A good budget is one that has buy-in from all departments in the
company, is realistic yet strives for achievement, has been risk-adjusted to allow for a margin of
error, and is tied to the company’s overall strategic plan. In order to achieve this, the budget
needs to be an iterative process that includes all departments. It can be zero-based (starting
from scratch each time) or building off the previous year, but it depends on what type of business
you’re running as to which approach is better. It’s important to have a good budgeting/planning
calendar that everyone can follow.

When should a company consider issuing debt instead of equity?

A company should always optimize its capital structure. If it has taxable income, then it can
benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows and is
able to make the required interest payments, then it may make sense to issue debt if it lowers
the company’s weighted average cost of capital.
How do you calculate the WACC?
WACC (stands for Weighted Average Cost of Capital) is calculated by taking the percentage of
debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax
rate, plus the percentage of equity to capital, multiplied by the required return on equity. Learn
more in CFI’s free Guide to Understanding WACC.

Which is cheaper, debt or equity?

Debt is cheaper because it is paid before equity and has collateral backing it. Debt ranks ahead of
equity on liquidation of the business. There are pros and cons to financing with debt vs equity
that a business needs to consider. It is not automatically better to use debt financing simply
because it’s cheaper. A good answer to the question may highlight the tradeoffs, if there is any
followup required. Learn more about the cost of debt and cost of equity.

A company has learned that due to a new accounting rule, it can start capitalizing R&D costs
instead of expensing them.
This question has four parts to it:

Part I) What is the impact on the company’s EBITDA?

Part II) What is the impact on the company’s Net Income?
Part III) What is the impact on the company’s cash flow?
Part IV) What is the impact on the company’s valuation?

Answer:
Part I) EBITDA increases by the exact amount of R&D expense that is capitalized.
Part II) Net Income increases, and the amount depends on the depreciation method and tax
treatment.
Part III) Cash flow is almost unimpacted – however, cash taxes may be different due to changes in
depreciation expense, and therefore cash flow could be slightly different.
Part IV) Valuation is essentially constant – except for the cash taxes impact/timing impact on the
net present value (NPV) of cash flows.

What, in your opinion, makes a good financial model?

It’s important to have strong financial modeling principles. Wherever possible, model
assumptions (inputs) should be in one place and distinctly colored (bank models typically use a
blue font for model inputs). Good Excel models also make it easy for users to understand how
inputs are translated into outputs. Good models also include error checks to ensure the model is
working correctly (e.g., the balance sheet balances, the cash flow calculations are correct, etc.).
They contain enough detail, but not too much, and they have a dashboard that clearly displays
the key outputs with charts and graphs. For more, check out CFI’s complete guide to financial
modeling.

financial model example for finance interview question

Image: CFI’s Financial Modeling Courses.

What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question – only the balance sheet and cash flow statements are impacted
by the purchasing of inventory.
What is working capital?
Working capital is typically defined as current assets minus current liabilities. In banking, working
capital is normally defined more narrowly as current assets (excluding cash) less current liabilities
(excluding interest-bearing debt). Sometimes its even more narrowly defined as accounts
receivable plus inventory minus accounts payable. By knowing all three of these definitions you
can provide a very thorough answer.

What does negative working capital mean?

Negative working capital is common in some industries such as grocery retail and the restaurant
business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but
suppliers often give 30 days (or more) credit. This means that the company receives cash from
customers before it needs the cash to pay suppliers. Negative working capital is a sign of
efficiency in businesses with low inventory and accounts receivable. In other situations, negative
working capital may signal a company is facing financial trouble if it doesn’t have enough cash to
pay its current liabilities.

In this answer to this interview question, it’s important to consider the company’s normal working
capital cycle.

When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and
depreciated according to the company’s accounting policies.
How do you record PP&E and why is this important?
There are essentially four areas to consider when accounting for Property, Plant & Equipment
(PP&E) on the balance sheet: (I) initial purchase, (II) depreciation, (III) additions (capital
expenditures), and (IV) dispositions. In addition to these four, you may also have to consider
revaluation. For many businesses, PP&E is the main capital asset that generates revenue,
profitability, and cash flow.

How does an inventory write-down affect the three financial statements?

This is a classic finance interview question. On the balance sheet, the asset account of inventory
is reduced by the amount of the write-down, and so is shareholders’ equity. The income
statement is hit with an expense in either cost of goods sold (COGS) or a separate line item for
the amount of the write-down, reducing net income. On the cash flow statement, the write-
down is added back to cash from operating activities, as it’s a non-cash expense (but must not be
double counted in the changes of non-cash working capital). Read more about an inventory
write-down.

Why would two companies merge? What major factors drive mergers and acquisitions?
There are many reasons companies go through the M&A process: to achieve synergies (cost
savings), enter new markets, gain new technology, eliminate a competitor, and because it’s
“accretive” to financial metrics. Learn more about accretion/dilution in M&A.

[Note: Social reasons are important too, but you have to be careful about mentioning them,
depending on who you’re interviewing with. These include: ego, empire building, and to justify
higher executive compensation.]

If you were CFO of our company, what would keep you up at night?
This is one of the great finance interview questions. Step back and give a high-level overview of
the company’s current financial position, or the position of companies in that industry in general.
Highlight something on each of the three financial statements.

Income statement: growth rates, margins, and profitability.

Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios, leverage, return on assest
(ROA), and return on equity (ROE).
Cash flow statement: short-term and long-term cash flow profile, any need to raise money or
return capital to shareholders.
Non-financial statement: company culture, government regulation, conditions in the capital
markets.

6) What is the abbreviation for the accounting terms debit and credit?

The debit abbreviation is "dr" and credit abbreviation is "cr".

7) How many types of business transactions are there in accounting?

There are two types of transactions in accounting, i.e. revenue and capital.

8) What is the balance sheet?

It is a statement that states all the liabilities and assets of the company at a certain point.
Accounting Interview Questions
9) Have you ever heard about TDS, what it is?

Yes, TDS abbreviates Tax Deduction at Source.

10) In the balance sheet, where do you show TDS?

It is shown on the assets section, right after the head current asset.

11) Do you have any idea about GST?

GST stands for Goods and Service Tax. It's an indirect tax other than the income tax. Its charges
on the value of the service or product sold to a customer. The customer/clients pay the GST, and
the seller deposits the GST with the government. Some countries have sales, service tax with
works more or less the same as GST.
12) Do you think there is any difference between inactive and dormant accounts?

Yes, both are different terms in accounting. Inactive accounts mean that accounts have been
closed and will not be used in the future as well. While dormant accounts are those that are not
functional today but may be used in the future.

13) What is tally accounting?

It is the software used for accounting in small business and shops for managing routine
accounting transactions.

14) How can you define departmental accounting?

It is a type of accounting in which a separate account is created for departments. It is managed
separately as well as shown independently in the balance sheet.

15) Define fictitious assets?

These are the assets that cannot be shown or touch. Fictitious assets can only be felt such as
goodwill, rights, etc.

16) By saying, perpetual or periodic inventory system; what do we mean?

In the first one, i.e. the perpetual inventory system, the accounts are adjusted on a continual
basis. In the periodic inventory system, the accounts are adjusted periodically.

17) In accounting, how do you define the premises?

Premises refer to fixed assets that are shown in the balance sheet.

18) In accounting, VAT abbreviates what?

VAT means Value Added Tax.

19) Do you possess any knowledge about accounting standards?

Yes, as per my knowledge there are total 33 accounting standards published so far by ICAI. The
purpose of these standards is to implement the same policies and practices in any country.
20) What is ICAI?

It is the abbreviation of the Institute of Chartered Accountants in India.

21) How can you explain the basic accounting equation?

We know that accounting is all about assets, liabilities, and capital. Therefore, the accounting
equation is:

Assets = Liabilities + Owners Equity.

22) Define Executive accounting?

It is a type of accounting that is specifically designed for the business that offers services to
users.

23) Define Public accounting?

Public accounting offers audits and CPAs to review company financial records to ensure
accountability. It is for the general public.

24) What is a CPA?

CPA stands for Certified Public Accountant. To become a CPA, one should have to do many other
qualifications as well. It is a qualification with a 150-hour requirement. It means that one should
complete 150 credit hours at an accredited university.

25) What do you think is a bank reconciliation statement?

A reconciliation statement is prepared when the passbook balance differs from the cash book
balance.
26) Differentiate Public and Private Accounting?

Public accounting is a type of accounting that is done by one company for another company.
Private accounting is done for your own company.

27) What is project implementation?

Project implementation involves six steps in total such as:

Identify Need
Generate and Screen Ideas
Conduct Feasible Study
Develop the Project
Implement the Project
Control the Project
28) Do you think Accounting Standards are mandatory and why?

Yes, I do believe that accounting standards play a crucial role to prepare good quality and
accurate financial reports. It ensures reliability and relevance in financial statements.

29) Can you name different branches of accounting?

There are three branches of accounting, viz, "Financial Accounting," "Management Accounting"
and "Cost Accounting."

30) Differentiate Accounting and Auditing?

Accounting is all about recording daily business activities while auditing is the checking that
whether all these events have been noted down correctly or not.

31) Define dual aspect term in accounting?

As the name implies, the dual aspect concept states that every transaction has two sides. For
example, when you buy something, you give the cash and get the thing. Similarly, when you sell
something, you lose the thing and gets the money. So this getting and losing are basically two
aspects of every transaction.

32) What do we mean by purchase return in accounting?

It is the term introduced in the records for every defective or unsatisfactory good returned back
to its supplier.

33) Define the term material facts in accounting?

Material facts are the bills or any document that becomes the base of every account book. It
means that all those documents, on which account book is prepared, are called material facts.

34) Have you ever made MIS reports and what are they?

Yes, I have prepared a few MIS reports during my previous jobs. MIS reports are created to
identify the efficiency of any department of a company.

35) Define a company's payable cycle?

It is the time required by the company to pay all its account payables.

36) Define retail banking?

It is a type of banking that involves a retail client. These clients are normal people and not any
organizational customers.

37) How much mathematics knowledge is necessary or required in accounting?

Not much knowledge but basic mathematical background is required in accounting for operations
like addition, subtraction, multiplication, and division.

38) Define bills receivable?

All types of exchange bills, bonds and other securities owned by a merchant that is payable to
him are said as bills receivable.

39) Define depreciation and its types?

By depreciation, we mean that the value of an asset is decreasing as it is in use. It has two types
such as "Straight Line Method" and "Written Down Value Method."

40) Differentiate between consignor and consignee?

Consigner is the owner of the goods, or you can say he is the person who delivers the goods to
the consignee. The consignee is the person who receives the goods.

41) Define balancing in accounting?

Balancing means to equate both sides of the T-account i.e. the debit and credit sides of a T-
account must be equal/balanced.

42) How much statistics knowledge is necessary or required in accounting?

You must be very good at statistics if you want to do well in accounting. Otherwise, with
minimum knowledge, you cannot manage your day to day transactions effectively in accounting.

43) Define Scrap value in accounting?

It is the residual value of an asset. The residual value is the value that any asset holds after its
estimated lifetime.

44) What is Marginal Cost?

Suppose you have to produce an additional unit of output. The estimated cost of additional inputs
to produce that output is actually the marginal cost.

45) Define Partitioning in accounting?

It is a kind of groups made on the basis of the same responses by a system.

46) Differentiate between provision and reserve?

Provisions are the liabilities or the anticipated items such as depreciation. You can say provisions
are expenses. Reserves are the profits of any company, and a part of that profit is placed back to
the business to keep it sustainable in tough times of a company.

47) Define Offset accounting?

Offset accounting is one that decreases the net amount of another account to create a net
balance.

48) Define overhead in terms of accounting?

It is the indirect expenditure of a company such as salaries, rent dues, etc.

49) Define trade bills?

We know that all types of transactions need to be documented. The trade bills are the
documents, generated against each transaction.

50) Define fair value accounting?

As per fair value accounting, a company has to show the value of all of its assets in terms of price
on the balance sheet on which that asset can be sold.

51) What is compound journal entry?

A compound journal entry is just like other accounting entry where there is more than one debit,
more than one credit, or more than one of both debits and credits. It is essentially a combination
of several simple journal entries.

52) What are the accounting events that are frequently involved in compound entries?

The accounting events that are frequently involved in compound entries are;

Record multiple line items in a supplier invoice that address to different expenses
Record all bank deductions associated with a bank reconciliation
Record all deduction and payments related to a payroll
Record the account receivable and sales taxes related to a customer invoice
53) Mention the types of accounts involved in double entry book-keeping?
Double entry book-keeping involves five types of accounts,

Income accounts
Expense accounts
Asset accounts
Liability accounts
Capital accounts
54) Mention what are the rules for debit and credit for different accounts to increase the amount
in your business accounts?

The rules for debit and credit for different accounts,

for a capital account, you credit to increase it and debit to decrease it

for an asset account, you debit to increase it and credit to decrease it
for a liability account, you credit to increase it and debit to decrease it
for an expense account, you debit to increase it, and credit to decrease it
for an income account, you credit to increase it and debit to decrease it
55) List out the Stages of Double Entry System?

Recording of transactions in the journal

Posting of a journal entry into the respective ledger accounts and then preparing a trial balance
Preparing final accounts and closing of books of accounts
56) What is the disadvantage of double entry system?

The disadvantage of double entry system,

If there are any compensatory errors, it is difficult to find out by this system
This system needs more clerical labor.
It is difficult to find the errors if the errors are in the transactions recorded in the books
It is not preferable to disclose all the information of a transaction, which is not properly recorded
in the journal
57) What is General ledger account?

The General ledger account is an account where the company records all the information for its
various expenses and income types into separate accounts. Such that all the debits and credits
pertaining to that particular type of transaction can be entered in one place and kept balanced.

58) What is the general classification of accounts that usually ledger account involve?

The general classification of accounts that usually ledger account involves are

Assets- Cash, Accounts Receivable

Liabilities- Accounts Payable, Loans Payable
Stockholders' equity- Common Stock
Operating revenues- Revenues through Sales
Operating expenses- Rent Expense, Salaries Expense
Non-operating revenues and gains- Investment Income, gain on Disposal of Equipment
Non-operating revenues and losses- Interest Expense, Loss on Disposal of Equipment
59) Mention what are things will not be included in a bank reconciliation statement?

In a bank reconciliation statement, the following thing can be excluded.

Direct payments made by the bank not entered in Cashbook

Cheques deposited but not cleared
Cheques dishonored not recorded in cash book
Wrong debits given by the bank
Bank Charges or Interest debited by the bank
Banks direct payment not entered in Cashbook
60) Under the accrual basis of accounting, when revenues are reported in the accounting period?

When service or goods have been delivered, then revenues are reported in the accounting period.

61) Under what type of account do the unearned revenues fall?

The unearned revenues fall under "Liability" account.

62) Mention whether the account "Cash" will be credited or debited when a company pays a bill?

The account "Cash" will be credited when a company pays a bill.

63) What are assets minus liabilities?

Assets minus liabilities is equal to owners' equity or stockholders equity.

64) Entries to revenues accounts such as Service Revenues are usually?

Entries to revenues accounts such as Service Revenues usually goes into credit side.

65) What is the difference between accumulated depreciation and depreciation expense?

The difference between accumulated depreciation and depreciation expense is that

Accumulated depreciation: It is the total amount of depreciation that has been taken on a
company's assets up to the date of the balance sheet
Depreciation expense: It is the amount of depreciation that is reported on the income statement.
Basically, it is the amount that corresponds only to the period of time indicated in the heading of
the income statement.
66) List out some of the examples for liability accounts?

Some of the examples of liability accounts

Accounts Payable
Accrued Expenses
Short-term Loans Payable
Unearned or Deferred Revenues
Installment Loans Payable
Current Portion of Long-term Debt
Mortgage Loans Payable
67) Explain how you can adjust entries into account?

To adjust entries into account, you can sort entries into five categories.

Accrued expenses: Expenses have been incurred but the vendor's invoices are not generated or
processed yet
Accrued revenues: Revenues have been earned but the sales invoices are not generated or
processed yet
Deferred revenues: Money was received in advance of having been paid or earned
Deferred expenses: Money was paid for a future expense
Depreciation expense: An asset purchased in one period must be allocated to expense in each of
the accounting periods of the asset's useful life
68) Explain what a deferred asset is and give an example?

A deferred asset refers to a deferred debit or a deferred charge. An example of a deferred charge
is bond issue costs. These costs involve all of the fees or charges that an organization incurs in
order to register and issue bonds. These fees are paid in a near time when the bonds are issued
but it will not be expensed at that time.

69) Mention what is Bank Reconciliation?

A bank reconciliation is a process done by a company to ensure that the company's records
(check register, balance sheet, a general ledger account, etc.) are correct and that the bank's
records are also correct.

70) What is "deposit in transit"?

A deposit in transit is a check or cash that have been received and recorded by an entity, but
which have not yet been entered in the records of the bank where the funds are deposited.

71) What is an over accrual?

An over accrual is a condition where the estimate for an accrual journal entry is too high. This
estimate may apply to the accrual of expense or revenue.

72) What is account receivable?

A short term amounts due from buyers to a seller, who have purchased goods or services from
the seller on credit is referred to as account receivable.

73) What are the activities that are included in the Cash Flow Statement?

The cash flow statement showcase the cash generated and used during the year or months.
Various activities that are involved for the Cash Flow are

Operating activities – business activities accounting to cash

Investing activities – sale and purchase of equipment or property
Financial activities- purchase of stock and own bonds
Supplemental information- exchange of significant items that don't involve cash
74) What happens to the company's "Cash Account" if it borrows money from the bank by signing
a note payable?

Due to double entry, the "cash account" will increase as such the liability account increases.

75) Which account is responsible for interest payable?

The account which is responsible or affected by the interest payable is "Current liability account"

76) What is reversing journal entries?

Reversing journal entries are entries made at the beginning of an accounting period to cancel out
the adjusting journal entries made at the end of the previous accounting period.

77) Where do generally accruals appear on the balance sheet?

Accrued expenses usually tend to be extremely short-term. So you would record them within the
"current liabilities section" of the balance sheet.

78) List out some of the accrued expenses and the accounts in which you would record them?

Wage accrual is entered with a credit to the "wages payable account"

Interest accrual is entered with a credit to the "interest payable account"
Payroll tax accrual is entered with a credit to the "payroll taxes payable account"
79) Deferred taxation is a part of which equity?
Deferred taxation is a part of the owner's equity.

80) Mention what does the investment of personal assets by the owner will do?

The investment of personal assets by the owner will increase total assets and increase owner's
equity.

81) What is the equation for Acid-Test Ratio in accounting?

The equation for Acid-Test Ratio in accounting

Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities

82) List out things that fall under intangible asset?

Things that fall under intangible asset are,

Patents
Copyrights
Trademarks
Brand names
Domain names, and so on.
83) What is a trial balance in accounting?

In accounting, the trial balance is an accounting report that lists the balances in each of an
organization's general ledger accounts. This is done at the end of the posting journal entry to
ensure that there are no posting errors.

84) Where a cash discount should be recorded in a journal entry?

A cash discount should be recorded in a journal entry as a reduction of expense in "cash account."

85) Mention why some asset accounts have a credit balance?

Some asset accounts have a credit balance due to the following reasons,

Receiving and posting an amount that was higher than the recorded receivable
Expenses occurred faster than the agreed upon prepayments
An error caused by posting an amount to a wrong account
The amount of checks written exceeded the positive amount in the Cash account
Continuing to amortize or depreciate an asset after its balance has reached zero
86) What is Bad debt expense?

A Bad debt expense is the amount of an account receivable that is considered to NOT be
collectible.

87) What is the Master Account?

A Master Account has subsidiary accounts. A master account receivable could be anything, it
could be account receivable for various individual receivable accounts.

88) In which account does the unpresented cheque will get recorded?

The unpresented cheque will get recorded as a credit to the cash account in the company's
General ledger.

89) What knowledge should financial accountant have?

A certified financial accountant should have knowledge about

Accounting/Bookkeeping principles and practices
Reporting and analysis of financial data
Auditing practices and principles
Account management
Budgets
Software knowledge dealing with Accounting
Knowledge of relevant laws, codes, and regulations
Good soft skills
Being a team player
Ability to learn quickly and up skill
Basic Technical skills
90) What are the three factors that can affect your cash flow and business profitability?

The three factors that can affect your cash flow and business profit includes

Cash flows from investing activities: It includes shares, bonds, physical property, machinery, etc.
Cash flows from operating activities: It does not include cash received from other sources like
investments
Cash flow from financing activities: It includes any activities that involve dividend payments that
the company made to its shareholders, any money that includes stock to the public, any money
borrowed from the lender, etc. in other words, it is a report that tells the firm about the money
borrowed and paid out in order to finance its activities.
91) Explain what is accrual accounting?

Accrual Accounting is a method for measuring the performance and position of the company by
identifying economic events regardless of when the cash transaction happened. In this method,
revenue is compared with the expenditures, at the time in which the transaction happens rather
than when the payment is made.
92) Explain the term account payable?

Account payable is referred to as the amount the company owes to its suppliers, its employees,
and its partners. In other words, it is the basic cost levied on the company to run a business
process that is outstanding. Account payable for one company may be account receivable for
another firm or company.

93) Explain the meaning of long-term notes payable is or long term liabilities?

Long-term notes payable or liabilities are referred for that loan that is not supposed to due for
more than a year. These are the loans from banks or financial institution that are secured against
various assets on the balance sheet, such as inventories.

94) What is the difference between depreciation and amortization?

Capital expenses are either depreciated or amortized based upon the type of asset.

Depreciation

Amortization

Depreciate means to lose the value of an asset due to their usage, wear and tear, outdated, etc.
The depreciation cost is calculated in terms of tangible assets like furniture, plant & machinery,
building, etc.
The purpose of calculating depreciation costs recovery
The easiest way to calculate depreciation is to know the loss of value of an asset over its life.
For example, a car worth $30,000 has estimated the lifetime of 10 years after that it will have no
value in the market. The cost or loss in value throughout these 10 years is known as depreciation
Various method for depreciation includes straight-line depreciation, declining balance method,
group depreciation method, unit of time/production depreciation method, etc.
Amortize means to write off or pay the debt over a period of time. Amortization can be for loans,
or it can be for Intangible assets
Amortization cost is calculated in terms of intangible assets like goodwill, trademark, loans,
patents, etc.
The purpose of calculating amortization is also for cost recovery
Amortization calculates the amount spent after the intangible assets throughout the life for that
asset
For example, Pharmaceutical Company spent $20 million dollars on a drug patent with a useful
life of 20 years. The amortization value for that company will be $1 million each year
Various method for amortization is negative amortization, zoning amortization, business
amortization, etc.
95) What does the financial statement of the company include?

Financial statement of the company includes various information like

Balance Sheet ( Assets, liabilities, and equity)

Income statement ( Profit or Loss statement)
Equity statement
Cash flow statement
96) What is working capital?

Working capital is a financial metric that calculates the resources available to the company to
finance its day-to-day operations. It is typically calculated by deducting current liabilities from
current assets.

97) Explain what is ledger?

A ledger can be referred to as an accounting book that keeps the record of journal entries in
chronological order to individual accounts. The process of recording this journal entries is known
as posting.
98) Mention the types of ledgers?

There are three types of ledger

General ledger
Debtors ledger
Creditors ledger
99) Explain what is GAAP?

GAAP means Generally Accepted Accounting Principle; it is a framework of accounting, standards,

procedures & rules determined by the professional accounting industry and practiced by publicly
traded U.S companies all over the U.S.A.

100) Explain what is double-entry accounting? Explain with an example?

Double entry accounting is an accounting system that requires recording business transaction or
event in at least two accounts. It is the same concept of accounting, where every debit account
should be matched with a credit account.

For example, if a company takes a loan from a bank, it receives cash as an asset but at the same
time, it creates a liability on a company. This single entry will affect both accounts, the asset
accounts, and the liabilities accounts, such entry is referred to as double entry accounting.

101) Explain what does the standard journal entry includes?

A standard journal entry includes, date of the business transaction, name of the accounts
affected, amounts to be debited or credited and a brief description of the event.

102) Explain what is liabilities and what all does include in current liabilities?
Liability can be defined as an obligation towards another company or party. It may consist of
delivering goods, rendering services or paying money. They are the opposite of assets, and it may
include

Account payable
Interest and dividend payable
Bonds payable
Consumer deposits
Reserves for federal taxes
Short term loans
103) Mention in simple terms what is the difference between Asset, equity, and liabilities?

Asset: What financial institute (bank) or people owe you

Liabilities: It is something you owe people or organization
Equity: It is something you own, for example, the amount of your house loan you paid off

Question 1. What Are The Various Streams Of Accounting?

Answer :

There are three streams of accounting:

Financial Accounting: is the process in which business transactions are recorded systematically in
the various books of accounts maintained by the organization in order to prepare financial
statements. Theses financial statements are basically of two types: First is Profitability
Statement or Profit and Loss Account and second is Balance Sheet.
Cost Accounting: is the process of classifying and recording of expenditure incurred during the
operations of the organization in a systematic way, in order to ascertain the cost of a cost center
with the intention to control the cost.
Management Accounting: is the process of analysis, interpretation and presentation of
accounting information collected with the help of financial accounting and cost accounting, in
order to assist management in the process of decision making, creation of policy and day to day
operation of an organization. Thus, it is clear from the above that the management accounting is
based on financial accounting and cost accounting.
Question 2. Explain Financial Accounting. What Are Its Characteristic Features?

Answer :

Financial Accounting is the process in which business transactions are recorded systematically in
the various books of accounts maintained by the organization in order to prepare financial
statements. These financial statements are basically of two types: First is Profitability Statement
or Profit and Loss Account and second is Balance Sheet.

Following are the characteristics features of Financial Accounting:

Monetary Transactions: In financial accounting only transactions in monetary terms are

considered. Transactions not expressed in monetary terms do not find any place in financial
accounting, howsoever important they may be from business point of view.
Historical Nature: Financial accounting considers only those transactions which are of historical
nature i.e the transaction which have already taken place. No futuristic transactions find any place
in financial accounting, howsoever important they may be from business point of view.
Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the
financial accounting and prepare financial statements there from. It is also obligatory to get these
financial statements audited.
External Use: Financial accounting is for those people who are not part of decision making
process regarding the organization like investors, customers, suppliers, financial institutions etc.
Thus, it is for external use.
Disclosure of Financial Status: It discloses the financial status and financial performance of the
business as a whole.
Interim Reports: Financial statements which are based on financial accounting are interim reports
and cannot be the final ones.
Financial Accounting Process: The process of financial accounting gets affected due to the
different accounting policies followed by the accountants. These accounting policies differ mainly
in two areas: Valuation of inventory and Calculation of depreciation.
Question 3. Explain Cost Accounting. What Are The Objectives Of Doing It?
Answer :

Cost Accounting is the process of classifying and recording of expenditure incurred during the
operations of the organization in a systematic way, in order to ascertain the cost of a cost center
with the intention to control the cost.

Following are the basic three objectives of Cost Accounting:

Ascertainment of Cost and Profitability

Cost Control
Presentation of information for managerial decision making.

Question 4. What Are The Characteristic Features Of Cost Accounting?

Answer :

Following are the characteristic features of Cost Accounting:

Cost accounting views the whole organization from the individual component of the organization
like a job, a process etc.
Cost accounting aims at ascertaining the profitability of individual components of the
organization.
It is meant for those people who are part of the decision making process of the organization.
Thus, it is only for internal use.
It is not a legal requirement. It is not compulsory to maintain cost accounting records.
In Cost Accounting, data is immediately available which facilitates in decision making process.
Cost Accounting considers each and every transaction, whether related to past or future which
will have an impact on the business.
Question 5. Define Management Accounting. What Are Its Objectives?

Answer :

Management Accounting is the process of analysis, interpretation and presentation of accounting

information collected with the help of financial accounting and cost accounting, in order to assist
management in the process of decision making, creation of policy and day to day operation of an
organization. Thus, it is clear from the above that the management accounting is based on
financial accounting and cost accounting.

Following are the objectives of Management Accounting:

Measuring performance: Management accounting measures two types of performance. First is

employee performance and the second is efficiency measurement. The actual performance is
measured with the standardized performance and a report of deviation from the standard
performance is reported to the management for the effective decision making and also to
indicate the effectiveness of the methods in use. Both types of performance management are
used to make corrective actions in order to improve performance.
Assess Risk: The aim of management accounting is to assess risk in order to maximize risk.
Allocation of Resources: is an important objective of Management Accounting.
Presentation of various financial statements to the Management.
Question 6. What Are The Limitations Of Management Accounting?

Answer :

Limitations of Management Accounting:

Management Accounting is based on financial and cost accounting, in which historical data is used
to make future decisions. Thus, strength and weakness of the managerial decisions are based on
the strength and weakness of the accounting records.
Management Accounting is useful only to those people who are in the decision making process.
Tools and techniques used in management accounting only provide information and not ready
made decision. Thus, it is only a supplementary service.
In Management Accounting, decision is based on the manager’s institution as management try to
avoid lengthy courses of scientific decision making.
Personal prejudices and bias affect the decisions as the interpretation of financial information is
based on personal judgment of the interpreter.

Question 7. What Is The Scope Of Management Accounting?

Answer :

Following is the scope of Management Accounting:

Financial Accounting
Cost Accounting
Revaluation accounting
Control Accounting
Marginal Costing
Budgetary Control
Financial Planning and
Break Even Analysis
Decision accounting:
Reporting
Taxation
Audit
Question 8. What Are The Various Techniques Used To Discharge The Function Of Management
Accounting?
Answer :

Following are the technique used to discharge the function of management accounting:

Marginal Costing
Budgetary Control
Standard Costing
Uniform Costing
Question 9. Compare Financial Accounting And Cost Accounting.?

Answer :

Financial Accounting protects the interests of the outsiders dealing with the organization e.g
shareholders, creditors etc. Whereas reports of Cost Accounting is used for the internal purpose
by the management to enable the same in discharging various functions in a proper manner.
Maintenance of Financial Accounting records and preparation of financial statements is a legal
requirement whereas Cost Accounting is not a legal requirement.
Financial Accounting is concerned about the calculation of profits and state of affairs of the
organization as whole whereas Cost accounting deals in cost ascertainment and calculation of
profitability of the individual products, departments etc.
Financial Accounting considers only transactions of historical financial nature whereas Cost
Accounting considers not only historical data but also future events.
Financial Accounting reports are prepared in the standard formats in accordance with GAAP
whereas Cost accounting information is reported in whatever form management wants

Question 10. Compare Financial Accounting And Management Accounting?

Answer :
Financial Accounting reports are used by outside parties such as creditors, shareholders, tax
authorities etc. whereas Management Accounting reports are used by managers inside the
organization for planning, directing, controlling and taking decisions.
In Financial Accounting, only historical financial transactions are considered and do not consider
non financial transactions whereas in Managerial Accounting emphasis is on decisions affecting
the future, thus it may consider future data as well s non financial factors.
Maintenance of financial accounting records and preparation of financial statements is a legal
requirement whereas Management Accounting is not at all legal requirement. Moreover, these
systems have their own reporting formats.
In Financial Accounting, precision of information is required whereas in Management Accounting
timeliness of information is required.
In Financial Accounting, only summarized data is prepared for the entire organization whereas in
Management Accounting detailed reports are prepared about products, departments, employees
and customer.
Preparation of Financial Accounting is based of Generally Accepted Accounting Principles whereas
Management Accounting does not follow such principles to prepare reports.
Financial reports generated by the Financial Accounting are required to be accurate whereas
accuracy is not the prerequisite of management accounting.
Question 11. Compare Cost Accounting And Management Accounting?

Answer :

The scope of management accounting is broader than that of cost accounting.

Both the accounting streams are not a legal requirement.
Cost accounting provides only cost information for managerial use whereas management
accounting provides all types of accounting information i.e., cost accounting as well as financial
accounting information.
In Cost accounting, the main emphasis is on cost ascertainment and cost control whereas in
management accounting the main emphasis is on decision-making.
The various techniques used by cost accounting are standard costing, budgetary control,
marginal costing and cost-volume-profit analysis, uniform costing and inter-firm comparison,
etc. whereas management accounting also uses these techniques but also uses techniques like
ratio analysis, funds flow statement, statistical analysis etc.
Cost Accounting is a part of Management Accounting whereas Management accounting is an
extension of managerial aspects of cost accounting with the ultimate intention to protect the
interests of the business.
Question 12. What Do You Mean By Accounting Concepts? List Them.?

Answer :

Accounting concepts are those basis assumptions upon which basic process of accounting is
based.

Following are the basic accounting concepts:

Business Entity Concept

Dual Aspect Concept
Going Concern Concept
Accounting Period
Concept Cost Concept
Money Measurement Concept
Matching Concept
Explain the following:

Business Entity Concept: According to this concept, the business has a separate legal identity
than the person who owns the business. The accounting process is carried out for the business
and not for the person who is carrying out the business. This concept is applicable to both,
corporate and non corporate organizations.
Dual Aspect Concept: According to this concept, every transaction has two affects. This basic
relationship between assets and liabilities which means that the assets are equal to the liabilities
remains the same.
Going Concern Concept: According to this concept, the organization is going to be in existence for
an indefinite period of time and is not likely to close down the business in the shorter period of
time. This affects the valuation of assets and liabilities.
Accounting Period Concept: According to this concept, the indefinite period of time is divided into
shorter time periods, each one being in the form of Accounting period, in order to facilitate the
preparation of financial statements on periodical basis. Selection of accounting period depends
on characteristics like business organization, statutory requirements etc.
Cost Concept: According to this concept, an asset is recorded at the cost at which it is acquired
instead of taking current market prices of various assets.
Money Measurement Concept: According to this concept, only those transactions find place in the
accounting records, which can be expressed in terms of money. This is the major drawback of
financial accounting and financial statements.
Matching Concept: According to this concept, while calculating the profits during the accounting
period in a correct manner, all the expenses and costs incurred during the period, whether paid or
not, should be matched with the income generated during the period.

Question 13. Explain A)convention Of Conservation B)convention Of Materiality C) Convention Of

Consistency

Answer :

a)Convention of Conservation

This accounting convention is generally expressed as to “anticipate all the future losses and
expenses, without considering the future incomes and profits unless they are actually realized.”
This concept emphasizes that profits should never be overstated or anticipated. This convention
generally applies to the valuation of current assets as they are valued at cost or market price
whichever is lower.

b)Convention of Materiality

This accounting convention proposed that while accounting only those transactions will be
considered which have material impact on financial status of the organization and other
transactions which have insignificant effect will be ignored.. It gives relative importance to an
item or event.
c) Convention of Consistency

This accounting convention proposes that the same accounting principles, procedures and
policies should be used consistently on a period to period basis for preparing financial statements
to facilitate comparison of financial statements on period to period basis. If any changes are
made in the accounting procedures or policies, then it should be disclosed explicitly while
preparing the financial statements.

Question 14. What Are The Various Systems Of Accounting? Explain Them.

Answer :

There are two systems of Accounting:

1) Cash System of Accounting: This system records only cash receipts and payments. This system
assumes that there are no credit transactions. In this system of accounting, expenses are
considered only when they are paid and incomes are considered when they are actually received.
This system is used by the organizations which are established for non profit purpose. But this
system is considered to be defective in nature as it does not show the actual profits earned and
the current state of affairs of the organization.

2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are
considered during that period to which they pertain. This system of accounting is considered to
be ideal but it may result into unrealized profits which might reflect in the books of the accounts
on which the organization have to pay taxes too. All the company forms of organization are
legally required to follow Mercantile or Accrual System of Accounting.

Question 15. What Are The Different Types Of Expenditures Considered For The Purpose Of
Accounting?

Answer :

For the accounting purpose expenditures are classified in three types:

Capital Expenditure is an amount incurred for acquiring the long term assets such as land,
building, equipments which are continually used for the purpose of earning revenue. These are
not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment.
Benefits from such expenditure are spread over several accounting years.

E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and
commission paid.

Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from
which is also enjoyed in the same period only. This expenditure does not increase the earning
capacity of the business but maintains the existing earning capacity of the business. It included all
the expenses which are incurred during day to day running of business. The benefits of this
expenditure are for short period and are not forwarded to the next year. This expenditure is on
recurring nature.

Eg: Purchase of raw material, selling and distribution expenses, Salaries, wages etc.

Deferred Revenue Expenditure is a revenue expenditure which has been incurred during an
accounting year but the benefit of which may be extended to a number of years. And these are
charged to profit and loss account. E.g. Development expenditure, Advertisement etc.

Question 16. Define Management Accounting?

Answer :

Management Accounting is the process of analysis, interpretation and presentation of accounting

information collected with the help of financial accounting and cost accounting, in order to assist
management in the process of decision making, creation of policy and day to day operation of an
organization. Thus, it is clear from the above that the management accounting is based on
financial accounting and cost accounting.
Question 17. What Are Its Objectives Of Management Accounting?

Answer :

Measuring performance: Management accounting measures two types of performance. First is

employee performance and the second is efficiency measurement. The actual performance is
measured with the standardized performance and a report of deviation from the standard
performance is reported to the management for the effective decision making and also to
indicate the effectiveness of the methods in use. Both types of performance management are
used to make corrective actions in order to improve performance.
Assess Risk: The aim of management accounting is to assess risk in order to maximize risk.
Allocation of Resources: is an important objective of Management Accounting.
Presentation of various financial statements to the Management.
Question 18. What Are Capital Expenditures? Is It Ok To Consider These Expenditures While
Calculating The Profitability Of During A Certain Period?

Answer :

Capital Expenditure is an amount incurred for acquiring the long term assets such as land,
building, equipments which are continually used for the purpose of earning revenue. These are
not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment.
Benefits from such expenditure are spread over several accounting years.

E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and
commission paid.

No, Capital expenditure should not be considered while calculating profitability as benefits
incurred from the capital expenditure are long term benefits and cannot be shown in the same
financial years in which they were paid for. They need to be spread over a number of years to
show the true position in balance sheet as well as profit and loss account.

Question 19. Explain Revenue Expenditure. Does It Affect The Profitability Statement In A Period?
Answer :

Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from
which is also enjoyed in the same period only. This expenditure does not increase the earning
capacity of the business but maintains the existing earning capacity of the business. It included all
the expenses which are incurred during day to day running of business. The benefits of this
expenditure are for short period and are not forwarded to the next year. This expenditure is on
recurring nature.

As the return on revenue expenditure is received in the same period thus the entries relating to
the revenue expenditure will affect the profitability statements as all the entries are passed in the
same accounting year, the year in which they were incurred.

Question 20. Explain Deferred Expenditures. How Are These Expenses Dealt With In Profitability
Statement?

Answer :

Deferred Revenue Expenditure is revenue expenditure, incurred to receive benefits over a

number of years say 3 or 5 years. These expenses are neither incurred to acquire capital assets
nor the benefits of such expenditure is received in the same accounting period during which they
were paid. Thus they don’t affect profitability statement as they are not transferred to the
profitability statement in the period during which they are paid for. They are charged to profit and
loss account over a number of years depending upon the benefit accrued.

Question 21. Explain Personal Accounts. List Different Accounts Consisting Personal Account.

Answer :

Personal Accounts are the accounts of persons or organisations with whom the organisation
deals in various capacities.
Personal Accounts consist of following types of accounts:

Accounts of Customers
Accounts of Suppliers
Accounts of Bank/Financial Institutions
Capital Account
Question 22. Explain Real Accounts. List Different Accounts Consisting Real Accounts In Practical
Circumstances.?

Answer :

Real accounts are the accounts of assets which the company owns and accounts of liabilities
which the company owes. Real Account may also consist of some intangible assets.

Real Accounts consist of following types of accounts:

Building Account
Furniture Account
Machinery Account
Land Account
Goodwill Account
Patent Trade Marks Account
Question 23. What Are Nominal Accounts? List Accounts Consisting The Nominal Account.

Answer :

Nominal Accounts are the accounts of Incomes, Expenses, Losses and Gains.

Nominal Accounts consist of the following types of accounts:

Insurance Account
Wages Account
Interest Paid or Received Account
Commission Paid or Received Account
Telephone Expenses Account
Salary Account
Question 24. What Is The Principal Of Double Entry System Of Accounting? What Are The
Advantages Of Double Entry System Of Accounting?

Answer :

The principal of Double Entry system of Accounting is “Every debit has a corresponding credit”
hence the total of all debits has to be equal to the total of all credits. In simple words, every
business transaction affects two accounts. If one account is debited then the other account will
be credited with the similar amount. For example: if the business purchases a machinery worth
Rs. 500000, then machinery account gets debited with amount Rs. 500000 as the business is
receiving an asset for its operation, on the other side cash account automatically gets credited
with the same amount of Rs. 500000 as cash is going out of the business.

Advantages of Double Entry system of Accounting:

It considers both the aspects of business transaction

Arithmetic accuracy of the accounting records can be checked and verified by preparing trial
balance
Correct results of the operations can be ascertained by preparing Final Accounts
Correct valuation of assets and liabilities at any point of time by preparing Balance sheet
Question 25. What Are The Rules Of Double Entry Book Keeping For Various Types Of Accounts?

Answer :
Following are the basic rules of double entry book keeping for various types of accounts:

Personal Account : Debit the Receiver, Credit the Giver

Real Account : Debit what comes in, Credit what goes out

Nominal Account : Debit all the Expenses, Credit all the Incomes

Question 26. What Is Trial Balance? What Does An Accurate Trial Balance Suggest?

Answer :

Trial Balance is a summary of all the balances of various ledger accounts and Cash/Book
accounts of an organization at any given date. For the preparation of Trial Balance the entire
Ledger accounts and Cash book/Bank book are required to be balanced to get the closing
balance. Assets and Expenses accounts having debit balance are posted on debit side whereas
Income and Liability accounts having credit balance are posted on credit side of the Trial Balance.

An accurate Trial Balance is an evidence that all the transactions are recorded and posted in the
General Ledger account as per the accounting principles. It also ensures arithmetical accuracy of
the process of ledger posting.

Question 27. What Is Depreciation? What Are The Causes Of Depreciation? Is It A Cost? Why?

Answer :

Depreciation is a permanent, gradual and continuous reduction in the book value of the fixed
asset. Except Land all the fixed assets e.g. Car, Machinery, Furniture etc depreciates in value
making the asset useless after the end of a certain period.

Following are the causes of Depreciation:

Wear and Tear due to regular use of the asset
Deterioration occurs with the passage of time, whether the asset is in use or not
Damages done to the assets due to an accident like fire, mishandling etc.
Depletion of Asset
Obsolescence i.e. due to new technology in use, new inventions, innovations etc.
Yes, depreciation is a cost. It is a historical cost, which is charged against profits of the
organisation reducing the profitability. It is a non-cash cost as it is never paid or incurred in cash.

Question 28. What Is The Need Of Depreciation Account?

Answer :

According to the matching principle of accounting, the costs incurred in the accounting year
should be matched with the revenue or income earned during the same accounting year. Thus, it
is necessary to spread the cost of fixed asset less scrap or realizable value after the useful life of
the fixed asset is over and this process of ascertain the same is called depreciation accounting.

Thus, depreciation account is needed for mainly two purposes:

To ascertain due profits and to represent the value of the fixed asset at its unexpired cost i.e
book value of the asset less depreciation.

Question 29. What Is The Effect Of Depreciation Of Assets On Profits Received By Owners?

Answer :

Depreciation forms a part of cost which is used for arriving at correct estimation of profits, which
then is distributed to the owners of the business in the form of dividend. Addition of depreciation
to the cost reduces the amount of distributable profits.
By maintaining a depreciation account a part of the distributable profit is retained in the business
as a reserve which is used to purchase new machinery or for other purposes in the future which
reduces the profits or dividends received by the owners.

Question 30. List Various Methods For Calculating Depreciation.?

Answer :

Methods for calculating depreciation are:

Straight Line Method

Written Down Value(Reducing Balance)Method
Production Unit Method
Production Hour Method
Joint Factor Rate Method
Revaluation Method
Renewal Method
Question 31. Explain Straight Line Method To Calculate Depreciation. What Are It Advantages And
Limitations?

Answer :

It is the simplest and most often used technique. The components used to calculate Straight Line
Method are:

Cost of Asset
Estimated Scrap vale-is the value of the asset at the end of life of the asset
Estimated life of Asset
Formula to calculate:

Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years

The main advantage of this method is that an equal amount of depreciation is charged every year
throughout the life of the Asset which makes the calculation of depreciation easy.

But the limitation of this method is that the amount of depreciation charged on the asset in the
later years is high due to the reduced value of the asset.

Question 32. Explain Written Down Value (reducing Balance) Method To Calculate Depreciation.
What Are The Benefits Of This Method?

Answer :

In Written Down Value Method, the rate of depreciation is predetermined. This is done by
deducting the amount of depreciation charged before from the balance of cost of asset (Cost of
Asset-Estimated Scrap Value). In simple words, in the first year the amount of depreciation
charged is high and it gradually starts decreasing during the subsequent years.

Formula to calculate:

Depreciation = 1-

N= number of years

R= Residual/Scrap Value

C=Cost of the asset

The main benefit of this method is that it recognises this fact that in the initial phase of an asset,
costs of maintenance, repairs etc. are less which goes on increasing with the progressing life of
the asset. Thus, by charging higher amount of depreciation in the initial years and gradually
decreasing the amount of depreciation counterbalance both the lower amount of repairs and
maintenance cost in the initial years and the gradual increase later on. It can be noted here that
the written down value can never be zero.

Question 33. Explain Production Unit Method To Calculate Depreciation.

Answer :

Production Unit Method is also a method of calculating depreciation. According to this method,
rate of depreciation is predetermined at per unit, which is calculated on the basis of total number
of units produced during the life of the asset. This method gives more importance to the usage
factor. Higher the number of units produced, higher will be the amount of depreciation and vice
versa.

Formula to calculate:

Rate of Depreciation per unit = (Cost of machine – Estimated Scrap Value) / Estimated number of
units produced

Question 34. Explain Annuity Method Of Calculating Depreciation.?

Answer :

In this method, the purchase of an asset is considered an investment of capital on which a certain
rate of interest is earned. The cost of the asset and the interest are written down annually by
equal instalments until the book value of the asset is reduced to nil.

The annual charge by way of depreciation is found out from the annuity tables. The annual
charge for depreciation will be credited to asset account and debited to depreciation account
while the interest will be debited to asset account and credited to interest account. The
disadvantage of this method is that it is a complicated method to charge depreciation. Secondly,
the burden on Profit and Loss account goes on increasing with the passage of time and the
amount of interest goes on diminishing as years pass by.

Thus this method is best suited to those assets which require considerable investment and don’t
require frequent additions.

Question 35. Explain Joint Factor Rate Method Of Calculating Depreciation.?

Answer :

This method is also used to calculate amount of depreciation. In this method the depreciation is
provided partly at a fixed rate on time basis and partly at a variable rate on usage basis.

Question 36. What Is Sinking Fund Method Of Calculating Depreciation?

Answer :

It is also known as Depreciation fund method. Under this method a sinking fund or depreciation
fund is created. Every year the profit and loss account is debited and fund account is credited with
a sum, which is calculated such that the annual sum credited to the fund account which is
accumulating throughout the life of the asset will be equal to the sum required to replace the old
asset. The main advantage of this method is that it accumulates interest or dividends by regular
investment of cash outside the business e.g.in securities to finance the replacement of the
assets, which has become useless.

But on the other hand this method has disadvantage also as the burden of profit and loss
account goes on increasing as years pass by since the amount spent on repairs and maintenance
goes on increasing due to the wear and tear of the asset and the amount of depreciation remains
same.

Question 37. Explain Endowment Policy Method Of Calculating Depreciation.?

Answer :

This method is similar to Sinking Fund method except in this method instead of investing in
securities the amount set aside is used to pay premium on an Endowment Policy. And the policy
should mature on the date on which the ceases its useful life. This collected money is then used
to replace the expired asset.

Question 38. What Method Of Depreciation Calculation Is Used To Calculate The Tax Liability
According To Income Tax Act, 1961?

Answer :

According to Income Tax Act, 1961 Written Down Method of depreciation is used to calculate the
tax liability. In this method, depreciation is charged at predetermined rate, which is calculated on
the balance of cost of asset less amount of depreciation previously charged. The rate at which
the depreciation will be calculated is also specified in the Income Tax Act 1961.

Question 39. How Is Depreciation Calculated As Per Schedule Xiv Of Companies Act, 1956?

Answer :

As per Schedule XIV of Companies Act, 1956 the company can calculate the depreciation by using
either Straight Line Method or Written Down Value Method.

The rate to calculate depreciation is also specified in Schedule XIV. If any addition has been made
to any asset during the financial year, depreciation on such an asset will be calculated on pro-rata
basis from the date of such addition or upto the date on which such asset has been sold.

Question 40. How Are The Fixed Assets Categorized To Calculate The Depreciation As Per
Schedule Xiv Of Companies Act, 1956?

Answer :
To calculate depreciation as per Schedule XIV of Companies Act, 1956 the fixed assets are
categorized as below:

Buildings-Factory Buildings as well as Administration buildings

Plant and Machinery
Furniture
Vehicles
Computer Installations
Question 41. Does Depreciation Generate Funds For Replacement Of Assets?

Answer :

Yes, depreciation generate funds for replacement of assets. When depreciation is charged
against the asset, a significant portion is taken out of the profits every year during the lifetime of
the existing assets, and is retained and accumulated without being distributed to the owners as
dividend. Thus at the end of the life of the existing asset, the business will have some funds to
replace old asset with the new one.

Question 42. Compare: Depreciation As Per Companies Act And Income Tax Act?

Answer :

Under the Companies Act: Depreciation is computed either using the straight line method or
written down value method. In straight line method the amount of depreciation is uniform for all
the years where in written down method the amount of depreciation is highest in the first year
and gradually decreases in the subsequent years.

Under Income Tax Act: Depreciation is computed using written down value method. Also it is
charged on the block of assets and not on individual assets. The block of assets means a group of
assets for which the same rate of depreciation is applicable.
Question 43. What Is Journalizing? What Are The Columns Of A Journal?

Answer :

Journalizing is the process of recoding business transactions in the Journal in chronological order,
as and when the transactions take place. Journal is also known as Book of Original Entry or the
Book of Prime Entry.

Journal has following five columns:

Date
Particulars
Ledger Folio
Amount Debited
Amount Credited
Question 44. Explain Compound Journal Entry.?

Answer :

In day to day business, various similar transactions take place on the same day and every account
is either debited or credited. Thus instead of passing different entries, a compound entry can be
passed, which involves more than one debit or more than one credit or both. This makes the
journal less bulky and avoids duplication.

Question 45. What Are Subsidiary Books? Why Are They Maintained?

Answer :
Subsidiary book is the sub division of Journal. These are known as books of prime entry or books
of original entry as all the transactions are recorded in their original form. In these books the
details of the transactions are recorded as they take place from day to day in a classified manner.

The important subsidiary books used are as following:-

Cash Book : Used to record all the cash receipts and payments.

Purchase Book : Used to record all the credit purchases.

Sales Book : Used to record all the credit sales

Purchase Return Book : Used to record all goods returned by business to the supplier

Sales Return Book : Used to record all good returned by the customer to the business.

Bills Receivable Book : Used to record all accepted bills received by business.

Bills Payable Book : Used to record all bill accepted by us to our creditors.

Journal Proper : Used to record those transactions for which there is no separate book.

These subsidiary books are maintained because it may be impossible to record each transaction
into the ledger as it occurs. And these books record the details of the transactions and therefore
help the ledger to become brief. Future reference and any desired analysis becomes easy as
transactions of similar nature are recorded together.

Question 46. What Is A Ledger? What Do You Mean By Ledger Posting?

Answer :
Ledger is the book where the transactions of similar nature pertaining to a person, asset, liability,
income or expenditure are drawn from the journal or subsidiary books where the transactions are
recorded in a chronological order and posted account wise in the Ledger account. Ledger
maintains all types of accounts i.e. Personal, Real and Nominal Account.

All the business transactions are first recorded in Journal or Subsidiary books in a chronological
order when they actually take place and from there the transactions of similar nature are
transferred to Ledger and this process of transferring is called as Ledger Posting.

Question 47. What Are Control Ledgers? What Are The Purposes Of Maintaining It?

Answer :

In a business, sometimes it is not feasible to carry accounts of all the suppliers and customers in
the main ledger. In such cases apart from General or main ledger, the control ledgers are
maintained. Control ledgers records the individual accounts. In the end of the period, balance
shown in the main ledger has to tally with the balance in the individual ledger accounts
maintained in the control ledger.

Purposes of maintaining control ledgers are:

Sundry Debtors
Sundry Creditors
Advances to Staff
Question 48. What Do You Mean By Balancing Of Ledger Account?

Answer :

To know the net effect of all the business transactions recorded in the ledger account, the
accounts need to be balanced. Thus, Balancing of Ledger Account means the balances of Debit
and Credit side should be equal and this involves following steps:
First total of both the sides are taken.
Secondly difference between the totals of both the sides is calculated.
If the debit side is in excess to the credit side then place the difference on the credit side by
writing By Balance c/fd.
If the total of credit side is in excess to the debit side, place the difference on the debit side by
writing To Balance c/fd.
After placing the difference on the appropriate side, make sure the totals of both the sides are
equal.
Question 49. Why Are Profit And Loss Accounts Prepared?

Answer :

Profit and Loss Account is a period statement which is prepared to show the profit or loss
incurred by the Organization in the year for which it is prepared. It is prepared to disclose the
result of operations of all the business transactions during a given period of time. It is also known
as profitability statement .It is the final result of all business transactions of the organization.
Profit and Loss account has four components namely Manufacturing Account, Trading Account,
Profit and Loss Account and Profit and Loss Appropriation Account. Gross profit or Gross loss so
calculated in trading account is taken to the profit and loss account.

Question 50. What Is A Balance Sheet? Why Is It Prepared?

Answer :

Balance Sheet is a Statement showing financial position of the business on a particular date. It
has two side one source of funds i.e Liabilities, the left side of the balance sheet and application
of funds i.e assets, the right side of the balance sheet. It is prepared after preparing trading and
profit and loss account and has balances of real and personal accounts grouped and arranged in
a proper way as assets and liabilities. It is prepared to know the exact financial position of the
business on the last date of the financial year.

Question 51. List The Type Of Items Which Appear Under The Liability Side Of A Balance Sheet.
Answer :

Items which appear under the liability side of Balance Sheet are:

Capital
Long Term Liabilities
Loan from bank
Mortgage
Current Liabilities
Sundry Creditors
Advance from Customers
Outstanding Expenses
Income Received in Advance
Question 52. What Are Adjustment Entries? Why Are They Passed?

Answer :

Adjustment entries are the entries which are passed at the end of each accounting period to
adjust the nominal and other accounts so that correct net profit or net loss is indicated in profit
and loss account and balance sheet may also represent the true and fair view of the financial
condition of the business.

It is essential to pass these adjustment entries before preparing final statements. Otherwise in
the absence of these entries the profit and loss statement will be misleading and balance sheet
will not show the true financial condition of the business.

Question 53. Explain Bank Reconciliation Statement. Why Is It Prepared?

Answer :
Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book
maintained by the concern and pass book maintained by the bank at periodical intervals. At the
end of every month entries in the cash book are compared with the entries in the pass book. The
causes of differences in balances of both the books are scrutinized and then reconciliation
statement is prepared.

This statement is prepared for a special purpose and once in a month. It is prepared with a view
to indicate items which cause difference between the balances as per the bank columns of the
cash book and the bank pass book at a particular date.

Question 54. What Are The Reasons Which Cause Pass Book Of The Bank And Your Bank Book
Not Tally?

Answer :

Cheques deposited into the bank but not yet collected

Cheques issued but not yet presented for payment
Bank charges
Amount collected by bank on standing instructions of the concern.
Amount paid by the bank on standing instructions of the concern.
Interest debited by the bank
Interest credited by the bank
Direct payment by customers into the bank account
Dishonour of cheques
Clerical errors
Question 55. What Type Of Errors Do Not Affect The Trial Balance?

Answer :
Following are the types of errors which do not affect the Trial Balance:

Compensating Error
Errors of Principle
Errors of Omission
Errors of Commission
Wrong amount recorded in the subsidiary books
Question 56. What Is Cost Accountancy? What Are The Objects Of Cost Accountancy?

Answer :

Cost accountancy is the application of costing and cost accounting principles, methods and
techniques to the science, art and practice of cost control and the ascertainment of profitability
as well as the presentation of information for the purpose of managerial decision making.

Following are the objects of Cost Accountancy:

Ascertainment of Cost and Profitability

Determining Selling Price
Facilitating Cost Control
Presentation of information for effective managerial decision
Provide basis for operating policy
Facilitating preparation of financial or other statements
Question 57. What Is The Difference Between Costing And Cost Accounting?

Answer :

Costing is the process of ascertaining costs whereas cost accounting is the process of recording
various costs in a systematic manner, in order to prepare statistical date to ascertain cost.
Question 58. What Is Cost Centre?

Answer :

Cost centre is defined as a location, machine, person, department, division, or any equipment or
group of these, in relation to which direct and indirect costs may be ascertained and used for the
purpose of cost control. Thus, an organisation for the costing purposes is divided in convenient
units and one of the convenient units is known as cost centre. Example: collecting, sorting,
washing of clothes are the various activities which are separate cost centre in a laundry.

The cost centre facilitates this function of cost control. Thus, correct identification of cost centre
is a prerequisite for the successful implementation of cost accounting process. This also
facilitates the fixation of responsibility in the correct manner.

Question 59. What Are The Various Elements Of Costs?

Answer :

There are three elements of cost:

Material Cost: This is the cost of material or the commodity used by the organisation for its
production purpose. Material is the substance, from which a product is made. Thus, it may be in a
raw or a manufactured state. It can be direct or indirect.

Direct Material Cost: forms an integral part of the finished product and is identified with the
individual cost centre. It is also described as process material, stores material, production
material, etc. Example: Raw materials purchased or purchased primary packing material, etc.

Indirect Material Cost: is used for ancillary purposes of the business and cannot be conveniently
identified with the individual cost centre. Example: Consumable stores, oil and waste, printing and
stationery material etc.
Labour Cost: This is the cost, incurred in the form of remuneration paid to the employees or
labours of the organisation. The workforce required to convert material into finished product is
called labour. It can be direct or indirect.

Direct Labour Cost: is the cost incurred on those employees who directly take part in the
manufacturing process and easily identified with the individual cost centre.

Indirect Labour Cost: is the cost incurred on those employees who do not directly take part in the
manufacturing process and cannot identified with the individual cost centre. Example: salary of
foreman, salesmen, director’s salary, etc.

Expenses: are the costs of services provided to the organisation. It can be direct or indirect.

Direct Expenses: are the expenses which can be directly identified with the individual cost centres.
Example: hire charges of machinery, cost of defective work for a particular job or contract etc.

Indirect Expenses: are the expenses which cannot be directly identified with the individual cost
centres. Example: rent, lighting, telephone expenses, etc.

Question 60. Explain Gross Profit.?

Answer :

Gross Profit is a company’s revenue minus its cost of goods sold. It is also known as gross margin
and gross income. It is calculated by subtracting all costs related to sales i.e manufacturing
expenses, raw materials, labour, selling and advertisement expenses from sales. It is an
indication of the managements’ efficiency to use labour and material in the production process.

Gross Profit = Net Sales – Cost of Goods Sold

Question 61. How Do You Calculate The Following Inventory Levels?

Answer :

Re-order level = Maximum Lead Time x Minimum Lead Time

Maximum level = Reorder Level + Reorder Quantity – (Minimum Usage x Minimum Lead Time)
Minimum level = Reorder Level – (Normal Usage x Normal Lead Time)
Danger level = Maximum Level x Lead time for Emergency purchases
Question 62. What Can Be The Discrepancies In Material Receipt?

Answer :

There are two categories of material discrepancies:

First category includes:-

Quantity received in excess

Quantity received in short
Quantity damaged
Receipt of incorrect quantity of material.
These discrepancies are normally caused by the transportation system.
Second category includes – Discrepancies in quality of material supplied.
These discrepancies are caused by the manufacturer.
Question 63. What Is Time Booking? What Are The Different Methods Used For Doing This?

Answer :

Time booking is recording the time actually spent by a worker on various jobs done by him in the
factory for cost analysis and dividing labour cost into various jobs and departments. It also helps
in control over wastage of time- idle time.
Different methods used for time booking are:

Daily Time Sheets

Weekly Time Sheets
Job Cards
Daily Time Sheets: Under this method, a daily time sheet is provided to each worker on which
time spent by him on various work orders is mentioned. This method can be conveniently used if
the worker works on various jobs of short duration like in maintenance jobs. But this method is
disadvantages also as it involves considerable paper work.

Weekly Time Sheets: In this method time is recorded for all the jobs done during the week instead
of recording the work done for a day only. One sheet is allotted to each worker. It involves less
paper work. These types of weekly time sheets are useful for intermittent types of jobs like
construction work.

Job Card: Job Card is a method of recording details of time with reference to the jobs or work
orders undertaken by the workers. This method facilitates the computation of labour cost with
reference to jobs or work orders.

Question 64. What Does Reconciliation Of Time Attended And Time Booked Tell Us?

Answer :

If the company is maintaining a system of time card and job card, the problem of reconciliation
becomes simple as both the details are on the same card. If the time booked as per the job cards
is less than the attendance time, this shows the idle time during which the worker has not done
any work, though he was present in the factory. Thus, reconciliation of time attended and time
booked tells us the actual amount of work done by the worker in comparison with the number of
hours spent by him in the factory.

Question 65. Define Simultaneous Equation Method And Repeated Distribution Method?
Answer :

Simultaneous equation method:- is the method where the amount of each production
department can be obtained by solving simultaneous method.

Repeated distribution method:- is where the overheads of service department are distributed to
other departments on agreed percentage, and this process is repeated till the amount of
overheads are exhausted to consider further apportionment.

Question 66. What Is Budget? What Are Its Characteristics?

Answer :

A budget is a financial document or an action plan which is prepared and used to project future
income and expenses. It outlines an organisation’s financial and operational goals. It can also
include non- monetary information with the monetary information. They need to be made and
approved in advance of the year in which they are to be used or implemented.

Following are the characteristics of a good budget:

It is expressed in quantitative or monetary terms.

It is prepared for a fixed period of time It is prepared before the period in which it commences.
Practical to implement.
It spells out the objects and the policies to be pursued in order to achieve the objective of the
organisation.
Many people are involved in drawing up a budget.
Flexible enough to allow changes in the changing environment.
Prepared on the basis of established standards of performance.
Analysis of cost and revenues.
On the basis of budget report performance of the organisation is constantly monitored.
Question 67. What Is Budgetary Control? What Are Its Characteristics?

Answer :

Budgetary Control is a methodical control technique whereby budgets are prepared relating the
responsibilities of budget holders. It is a continuous comparison of actual results with budgeted
results, to ensure that the objectives of the company’s policy are achieved; or to provide a basis
for the change of those objectives. In simple terms, it is the analysis of the plans which the
organisation has made; what was the result when those plans were implemented practically.
After practical implementation of the budget if any variation is seen in the actual result to the
budget result then the reasons for the variations are fount out and corrective actions are taken to
correct variations.

Following are the characteristics of Budgetary control:

It deals with the establishment of the budgets.

A control technique where actual results are extracted from the organisation’s operations and
compared with the budget prepared.
Any differences or variations are computed and made the responsibility of key individual who can
either take actions for maintain the favourable variations or revise the budgets.

1. "What is the difference between accounts receivable (AR) and accounts payable (AP)?"
This is one of many elementary accounting interview questions you can use to find out more
about the general accounting knowledge of entry-level job candidates for bookkeeping or
accounting clerk openings. Their responses, both verbal and non-verbal, will reveal whether they
understand accounting fundamentals.

2. "When a company is using double-entry accounting, what elements of a given ledger must be
equal?"
This is another fairly basic inquiry. Candidates with some accounting training or experience should
have no trouble coming up with an answer. As with question one, the manner in which the
applicants reply may show you they are under- or overqualified for a junior-level job at your
company.
3. "What are two or three types of special journals?"
While this is still a fairly basic question, you may tailor your follow-up queries according to the
specifics of your business or to the candidate’s work history. Or, as a skill test, you could present
a few journal samples for the applicant to read and then explain. The way the person responds to
this accounting interview question will show the skill level in identifying mistakes or omissions.

4. "If a company has three bank accounts for processing payments, what is the minimum number
of ledgers it needs?"
Use this as a starting point in the interview to explore a candidate’s knowledge of ledgers.
Observe the interviewee's initial reaction and use it as a leaping off point for further discussion of
skills related to the opening you are trying to fill. Expect the response to reveal the extent to
which the applicant has thought through how accounts relate to lines of business and generally
accepted accounting principles.

Speaking of payments, have you thought about whether the salary you'll offer is competitive?

5. "What methods have you used for estimating bad debt?"

This accounting interview question can open a conversation about the ways the applicant has
approached this routine process with previous employers. This line of inquiry allows recent grads
to apply theoretical knowledge in venturing educated guesses. The answer will reveal the level of
understanding of the methods most commonly used and could open a dialogue about how your
company handles this.

6. "Why is it easier for someone to perpetrate fraud using a journal entry than with a ledger?"
Accounting professionals, particularly those who have managed ledgers or had jobs as full-
charge bookkeepers for more than a couple of years, should be able to speculate on this
scenario. A candidate with more formal training specific to auditing or fraud analysis will likely
explain this thoroughly and be able to provide examples.

7. "Which enterprise resource planning (ERP) systems have you used?"

Most professionals, especially those with experience working for medium to large organizations,
should have an answer for this. A response might include any of the following: Hyperion,
Microsoft Dynamics GP or Oracle Enterprise Manager. For entry-level candidates, you might turn
this into a discussion of accounting certifications and future training possibilities. For example,
ask which ERP systems they would like to master. Discussion of these tools, how the applicants
learned them and put them to work, and what applications your company uses will reveal how
much, if any, training might be needed.

8. "What is your experience with developing business metrics?"

Though somewhat general, this finance interview question can elicit answers useful in evaluating
entry-level business or financial analyst candidates all the way up to mid-career professionals
who aspire to roles that come with budget and staff oversight responsibilities.

9. "If a private company with break-even operations received a $10 million investment, how
would you develop a strategy to spend or invest that money?"
This is one of those interview questions for accounting that falls into the category of situational
interview techniques, a tactic useful in gauging an applicant’s ability to think through a scenario
like one that might be faced in a more senior finance role. The answers will show you if the
approach is in alignment with that of your existing team, which will also indicate if this candidate
is a good fit for your organization’s culture.

10. "What challenges have you faced in leading a team through an analysis project?"
We’ve left this question, designed for probing leadership skills, somewhat general. It is another
interview question you can modify to better explore the particularities of your opening or the
backgrounds of your candidates. As with question nine, the answers will reveal the levels of
critical thinking skills and elicit a better picture of the leadership techniques of the people you're
interviewing.

11. “What do you consider the top three skills of a great accountant?”
Yes, you’re looking for someone with numerical abilities, but not necessarily a mathematician.
You also need someone with analytical know-how, who can communicate with others. Look for
responses that show a recognition of the importance of general business knowledge, technology
expertise, leadership abilities, customer service orientation and specialized experience that might
apply to the role.

12. “Can you give me an example of how you would explain a complex accounting process or
finance data to a staff member?”
Here’s where you’ll find out more about those communication skills. Look for an ability to simplify
information and present it so people outside the department — those who may not speak the
language of “FIFO” (First In First Out, a method of valuing inventory) or “EBITDA margins”
(Earnings Before Interest, Taxes, Depreciation and Amortization) — understand it.

13. “When you buy a piece of equipment for a company, what is the impact on the three financial
statements?”
This is another basic accounting question that will allow you to gauge an understanding of cash
flow statements, balance sheets and income statements. But before the interviewees even get to
those, they may have some questions for you, such as, should they answer for the time of
acquisition or for some time in the future, and how is the equipment financed?

14. “How do you define big data, and why is it important for finance teams to have expertise in
it?”
The advent of big data is prompting managers to look for these qualities in today’s accounting
and finance hires. You may not need big data experts right now, but finding someone who has
knowledge of data retrieval, interpretation and analysis could provide useful down the line when
you decide to build your team’s expertise in this area.

Browse candidates in your city using our online database, and we can arrange an interview or
placement.

15. “Describe a time you’ve made an accounting error and how you handled it.”
Rather than making a judgment on the mistake, look for the lessons learned, whether they took
responsibility, and how they managed it. Were they proactive? Strategic?

16. “How do you minimize the risk for error in your work?”
This is the second part of that question. The best responses should shed light on their process for
reviewing their work and minimizing miscalculations.

17. “How do you differentiate between auditing and accounting?”

If you’re interviewing recent graduates, you’re looking to see how well they paid attention in
class, rather than a deep level of expertise. Look for an ability to explain the fundamentals of the
roles and processes, much like the AR/AP question.
18. “What accounting software are you most familiar with?”
While it may be ideal to find expertise in the same accounting programs you use in your company
— Excel, Hyperion, IBM Cognos, QuickBooks, ERP and so on — it’s even more valuable to find
someone who is software savvy and able to get up to speed with a variety of programs. Some
companies have embraced cloud financial solutions, and while experience in online-based
software and services is valuable, the ability to get comfortable with the new technologies is
worthwhile, too.

19. “What criteria do you use to assess the reliability of the financial information you receive?”
Look for answers that show high performance standards. Perhaps the candidate has designed
methods to check for bookkeeping errors or quality-control issues in the data-entry process.
What you’re looking for are answers that help you evaluate attention to detail and accuracy.

20. “What do you think of the most recent updates in the accounting standards?”
Unlike questions that probe problem-solving abilities or relevant skills, this one explores
knowledge and critical thinking. Are the candidates current on accounting standards such as
Generally Accepted Accounting Principles (GAAP)? Are they aware of the new lease accounting
standard? Have they had training in the new tax changes? Their responses will help you
determine their commitment to the profession they’ve chosen and their ability to express
themselves.

Question 1. List Down The Errors Which Affect Trial Balance And Errors Which Do Not Affect Trial
Balance ?

Answer :

Errors which affect the agreement of trial balance:

Wrong totaling of subsidiary books.

Posting on the wrong side of an account
Omission of posting an amount in the ledger
Posting of wrong amount
Error in balancing
Errors which do not affect the agreement of trial balance:
Error of Principle
Errors of Omission
Errors of Commission
Recording of wrong amount in the books of prime entry or subsidiary books.
Compensating Errors.
Question 2. What Is The Relation Between Journal And Ledger ?

Answer :

The journal is the book of first entry whereas the ledger is the book of second entry.
The journal as a book of source entry ordinarily has greater weight as legal evidence than the
ledger.
The journal is the book for chronological record whereas the ledger is the book for analytical
record.
The unit of classification of data within the journal is the transaction; in the ledger the unit of
classification of data within the ledger is the account.
The process of recording in the journal is called journalizing, the process of recording in the
ledger is called posting.
Question 3. What Are The Common Errors In Accounting? What Steps Will You Follow To Locate
Errors ?

Answer :

Following are the common errors in accounting:

Errors of Omission
Errors of Commission
Errors of Principle
Compensating Error
To locate the errors in the trial balance follow the below steps:

Check the total of all the subsidiary books, cash book and trial balance.
Ensure that all the opening balances have been correctly brought forward in the current year’s
books of account.
Ensure that all the ledger accounts have been properly balanced and the balances of all the
ledger accounts have been reflected in the Trial Balance.
The difference in trial balance should be halved to locate such errors.
If the difference in the trial balance is divisible by 9 without any reminder, it may indicate the
transposition or transplacement of the amounts.
The trial balance of the current year can be compared with the trial balance of the previous year
to locate certain highlighting error.

Question 4. What Are The Important Terms Used In Balance Sheet ?

Answer :

Assets
Current assets and fixed assets
Tangible assets and Intangible assets
Equity is a claim which can be enforced against the assets of the firm in the court. Thus equity
refers to a claim held by
An owner only,
A creditor only,
An owner and the creditor both.
Liability
Current Liability
Long term Liability or fixed Liabilities
Contingent Liabilities
Question 5. Why Is It Easier For Someone To Perpetrate Fraud Using A Journal Entry Than With A
Ledger ?

Answer :

Accounting professionals, particularly those who have managed ledgers or had jobs as full-
charge bookkeepers for more than a couple of years, should be able to speculate on this
scenario. A candidate with more formal training specific to auditing or fraud analysis will likely
explain this thoroughly and be able to provide examples.

Question 6. Which Enterprise Resource Planning (erp) Systems Have You Used ?

Answer :

Most professionals, especially those with experience working for medium to large organizations,
should have an answer for this. A response might include any of the following: Hyperion,
Microsoft Dynamics GP or Oracle Enterprise Manager. For entry-level candidates, you might turn
this into a discussion of accounting certifications and future training possibilities. For example,
ask which ERP systems they would like to master. Discussion of these tools, how the applicants
learned them and put them to work, and what applications your company uses will reveal how
much, if any, training might be needed.

Question 7. What Is The Difference Between A Trial Balance And A Balance Sheet ?

Answer :

Trial balance is a list of balances from the ledger account while balance sheet is a statement of
assets and liabilities.
Trial balance contains balances of all personal, real and nominal accounts, while balance sheet
contains balances of only those personal and real accounts which represent assets and liabilities.

Trial balance is prepared before preparation of trading and profit and loss account, while balance
sheet is prepared after the preparation of trading and profit and loss account.

Trial balance is prepared to check the arithmetical accuracy of posting into ledger while balance
sheet is prepared to indicate the financial position of the business on a particular date.

Debt and credit balances are shown side by side while balance sheet is prepared on a T form
basis, the left hand side showing liabilities while right hand side representing assets.

Closing stock does not appear in the trial balance while it is shown on the assets side of balance
sheet.

Question 8. What Do You Consider The Top Three Skills Of A Great Accountant ?

Answer :

Yes, you’re looking for someone with numerical abilities, but not necessarily a mathematician.
You also need someone with analytical know-how, who can communicate with others. Look for
responses that show a recognition of the importance of general business knowledge, technology
expertise, leadership abilities, customer service orientation and specialized experience that might
apply to the role.

Question 9. What Items Are Included In Profit And Loss Account ?

Answer :

Salaries
Rent
Rates and Taxes
Interest
Commission
Trade Expenses
Printing and Stationery
Advertisement
Carriage out, freight out, carriage out
Repairs
Travelling expenses
Samples
Depreciation
Apprentice premium
Life insurance premium
Insurance premium
Income tax
Interest on capital and drawings
Loss or gain on asset sold
Discount received and allowed
Trade discount

Question 10. What Is The Difference Between Cash Discount And Trade Discount ?

Answer :

Cash discount is an allowance made by retailers to the customers for prompt payment. On the
other hand, trade discount is an allowance made by the wholesaler dealer to retailers off the
catalogue or invoice price. This allowance is made between purchasers and sellers engaged in the
same class of trade.
Cash discount is always allowed or received when payment is made. Trade discount enables the
retailers to sell the products to customers at catalogue or price list issued by the wholesaler.

Cash discount is an allowance in addition to the trade discount made by the seller to the buyer.

Cash discount is recorded in account books while trade discount is not shown separately.

The main purpose of allowing trade discount is to enable the retailers to sell the goods at list
price while the purpose of providing cash discount is prompt payment by the debtor to the
creditor.

Question 11. What Is The Adjustment Entries Made While Preparing The Final Accounts From The
Trial Balance ?

Answer :

Closing Stock
Depreciation
Outstanding Expenses
Prepaid Expenses
Accrued Income
Income received in advance
Bad Debits
Provision for Doubtful Debts
Provision for Discount on Debtors
Interest on Capital
Drawings
Deferred Revenue Expenditure Written off
Abnormal Loss due to fire etc.
Goods distributed as free samples
Goods sent on approval basis
Commission payable to the manager
Question 12. What Is Bank Reconciliation Statement? What Are The Steps To Prepare It ?

Answer :

Bank reconciliation statement is a statement prepared at periodical intervals, with a view to

indicated the items which cause disagreement between the balances as per the bank columns of
the cash book and the bank pass book on any given date.

Follow the below steps to prepare a bank reconciliation statement

Take the balance either as per cash book or as per pass book as a starting point.
Compare the items appearing in the bank column of the cash book with the item appearing in the
bank pass book.
Tick off the items in the pass book with the entries in the cash book. A list of unticked items either
in cash book or pass book will be found.
Add or deduct items from the balance which has been taken as a starting point.
The resultant figure will be the balance as shown by the pass book or vice versa.

Question 13. What Are The Accounting Concepts ?

Answer :

Accounting concepts are the basic assumptions on which the process of accounting is based.
Following are the accounting concepts

Business Entity Concept

Dual Aspect Concept
Going Concern Concept
Accounting Period Concept
Cost Concept
Money Measurement Concept
Matching Concept
Question 14. What Is Deferred Revenue Expenditure? Give Some Examples. ?

Answer :

Deferred Revenue Expenditure is a type of expenditure which does not result into the acquisition
of any fixed asset and the benefits from such expenditure is not received during the period which
they are paid for.
For example: Initial Advertisement Expenditure, Research and development Expenditure,
Preliminary Expenses.

Question 15. What Is Accounting Ethics ?

Answer :

Accounting ethics is primarily a field of applied ethics, the study of moral values and judgments
as they apply to accountancy. It is an example of professional ethics.

Question 16. What Is Creative Accounting ?

Answer :

Thinking outside the box” when such practice is not permitted. Creative accounting is actually a
good description of the practice, as it tends to create a picture, which is not technically correct
from the perspective of the information's intended user.

Question 17. What Is Fiduciary Accounting?

Answer :

Proper accounting for property that is entrusted to the fiduciary acting under the conditions set
forth in a deed

Question 18. What Is Accounting Transaction ?

Answer :

A transaction is an execution of a user program and is seen by the DBMS as a series or list of
actions. The actions that can be executed by a transaction include the reading and writing of
database.

Question 19. What Are The Uses Of Journal In Accounting ?

Answer :

The journal is most commonly used to record corrections to errors that have been made in
writing up the general ledger accounts

Question 20. What Is Account In Accounting ?

Answer :

A account is the method used to visualize the debit credit accounting procedure. The account can
represent any account regardless of expense, revenue, asset, or liability. The debits are placed
the left side and the credits on the right.

Question 21. Explain Which Accounting Applications Are Your Familiar With ?

Answer :

Discuss the applications you have worked with. Focus on how you implemented the application,
the steps taken during the conversion and integration of the accounting system and the training
of staff to use the application.

Question 22. What Is An Accounting Transaction ?

Answer :

An accounting transaction is the exchange of request/response messages to perform accounting.

Accounting can be performed in the form of accounting transactions that report on resource
usage by a session. Accounting transaction can occur during a session if accounting or charging
indications are needed [p&l based acct] or only at the start and the end of the session.

Question 23. What Are The Different Fields Of Accounting ?

Answer :

There is one field of accounting, but there are many different jobs within the field such as auditor,
bookkeeper, payroll accountant, cost accountant, tax accountants, etc. Accountants wear many
hats and often do different tasks for different clients.
Question 24. What Are The Effects Of International Accounting Standards On Accounting Practices
Of Developing Nations ?

Answer :

Adoption of international accounting standards is extremely costly. Developing counties usually

use accounting standards that are most beneficial to them (based on who they trade with to ease
accounting for transactions) or just another country's GAAP that works for the developing
country. Ex. Mexico very closely resembles U.S. GAAP because of NAFTA and the quality of U.S.
GAAP.

Should IFRS be implemented in developed counties, developing counties might be forced to

adopt them as well in order to maintain trade relations. This could be extremely costly for
smaller developing counties.

Question 25. Why Are Accounting Standards Necessary ?

Answer :

Accounting standards are necessary to promote high quality financial reporting. The fundamental
role of accounting is to communicate economic information about businesses and other
organization to various stakeholders including government, investors, shareholders, suppliers,
lenders, customers, and the public. These stakeholders use such information to take decisions
and to assess the stewardship of people appointed to manage such organizations. If this
information were not of a high quality standard, then the stakeholders would be unable to take
effective decisions that will benefit them. For example, if a financial report were manipulated to
show higher profits, investors would hold on to their shares with the belief that the company is
doing well.
Accounting standards came to be developed from the mid sixties onwards to promote the
integrity of the accounting profession by way of ensuring uniformity in the way accountants
report transactions in their books and in their preparation of the final accounts of businesses.
This is largely aimed at boosting the confidence of stakeholders, particularly shareholders and
potential investors in the accounting profession.
Good and useful information should have the essential characteristics of understandability,
comparability, relevance, and reliability in order to play its role effectively.
Accounting standards serve to promote the understandability, comparability, relevance, and
reliability of financial reports.
Question 26. What Is The Relationship Between Cost Accounting Financial Accounting And
Managerial Accounting ?

Answer :

Financial accounting relates to the information presented based on past events and records.

Cost and managerial accounting is the presentation of financial information to the management
to be used in decision making while in managerial accounting projections are made based on past
trends.

Financial accounting relates to the information presented based on past events and records.

Cost and managerial accounting is the presentation of financial information to the management
to be used in decision making while in managerial accounting projections are made based on past
trends.

Question 27. Explain Convention Of Materiality ?

Answer :

This convention proposes that while accounting for the various transactions, only those
transactions will be considered which have material impact on profitability or financial status of
the organization and other insignificant transactions will be ignore. In keeping with the principle
of materiality, unimportant items are either let out or merged with other items. Sometimes, such
items are shown as footnotes or in parentheses according to their relative importance.

Question 28. What Is Contingent Liabilities ?

Answer :

Contingent liability is an obligation, relating to a past transaction or other event or condition, that
may arise in consequence, as a future event now deemed possible but not probable. Thus such
liabilities as may arise in future are called contingent liabilities. For example: guarantee to a bank
for loan advanced to a third party, possible penalties, fines and penalties payable to the
government or income tax authorities etc. Future losses from natural calamities are not
contingent liabilities. They are not recorded in books of account. They do not appear on the
liabilities side of the balance sheet. They are shown by way of a footnote at the bottom of the
balance sheet.

Question 29. What Is Debit Note And Credit Note? What Is The Difference Between Them ?

Answer :

Debit note is an intimation sent to a person dealing with the business that his account is being
debited for the purpose indicated therein. It is a note made out with a carbon duplicate. The
original one is sent to the party to whom the goods are returned and the duplicate copy is kept
for office record.

Credit note is an intimation sent to a person dealing with the business that his account is being
credited for the purpose indicated therein.

Question 30. What Is Double Entry Bookkeeping? What Are Its Rules?

Answer :

Double entry bookkeeping follows the principle according to which every debit has a
corresponding credit; hence total of all debits is always equal to the total of all credits. In this
system, one account is debited and at the same time another account is credited by the similar
amount.
Question 31. What Is Accounting ?

Answer :

Accounting is a method or system used to keep track of and determine the financial status of a
person or company's income/assets and outlay of money/possessions. (An Accountant engages
in Accounting: “The occupation of maintaining and auditing records and preparing financial
reports for a business”

Question 32. Explain What Is Accounting Normalization ?

Answer :

It is removing items from the income statement or balance sheet that do not normally occur
during the course of business to better estimate the value of a company.

Question 33. What Is An Accounting Loss?

Answer :

It is when revenues are less than expenses.

Question 34. What Does The Abbreviation Dr Mean In Accounting ?

Answer :

‘Dr' means Debere in Latin stands for ‘what comes in' or in simple words whatever assets the
business owns or the expenses it has to pay comes under debit.
While ‘cr' means credere in Latin means ‘what goes out', in simple words whatever liabilities
business owns, or the income it earned during the year comes under credit.

Question 35. What Is An Ea In Accounting ?

Answer :

EA stands for Enrolled Agent. It is a certification by the Internal Revenue Service given to those
qualified to practice before them. To become an EA, one must pass a test given by the IRS, the
purpose of which is to try to ensure that only qualified people practice before the IRS. You may
not be a Power of Attorney for the IRS unless you are an EA or some other certified individual
such as a CPA or an attorney.

Question 36. What Is The Distinction Between Cost Accounting And Management Accounting ?

Answer :

Cost accounting is concerned with cost accumulation for inventory valuation to meet the
requirements of external reporting and internal profit measurement.

Management accounting relates to the provision of appropriate information for decision-making,

planning, control and performance evaluation.

Question 37. What Is Owner’s Equity? How Will You Calculate It ?

Answer :

Owner’s equity, also known as capital of the business is the claim of the owner of the business
against the assets of the business. Owner’s equity is calculated by subtracting equity of creditors
from the total equity.
Question 38. What Is Accounts Payable Cycle ?

Answer :

Demonstrate your knowledge of this cycle – the length of time it takes the company to pay its
accounts payable – and what the implications of the length of this cycle are for the company, for
example cash flow.

Question 39. What Is The Difference Between The Accrual Accounting And Cash Accounting ?

Answer :

The Cash Basis of accounting reports only transactions that have been completed in the current
reporting period – or – what has “hit” the checking account (assuming all funds are deposited and
disbursed only from that account) – The Accrual Basis of accounting reports all transactions that
the entity has entered into and includes the asset, liability, income and expense related them.

In addition, the Cash Basis of accounting is considered OCBOA (Other Comprehensive Basis of
Accounting ~ Other than GAAP) and the Accrual Basis (when implemented properly and fully) is
considered GAAP (Generally Accepted Accounting Principles).

EDIT – The Accrual Basis is more desirable from a user's standpoint as it includes transactions
that may exist were completed after the report dates that were initiated prior to the report date.
It is generally more complete and more reliable than the cash basis – however, that does assume
that the person preparing the statements has expertise of, not simply a cursory working
knowledge of, GAAP and the accrual basis. For example, a set of financial statements printed out
of QuickBooks are not necessarily GAAP compliant (or correct) although they may appear to be at
first glance or to a layperson.

Question 40. What Are Accounting Principles ?

Answer :
The Accounting Principles are the assertion rules of accounting and the application of these rules,
method, & procedures to actual practice of accounting.

These Accounting principles have been divided into

A. accounting concepts

B. accounting conventions

Question 41. What Is Computerized Accounting ?

Answer :

Accounting is the method in which financial information is gathered, processed, and summarized
into financial statements and reports.

The purpose of accounting is to provide information used in decision-making. Accounting may be

viewed as a system (a process) that converts data into useful information.

Information processes include:

Recording
Maintaining
Reporting
Every business has numerous processes. Some are simple, others complex and cumbersome.
However, as the business grows, acquires new customers, enters new markets, and keeps pace
with constant changes in statutory regulations… the company will need to maintain highly
accurate and up-to-date accounting, inventory, and statutory records.
This is where a computerized accounting helps simplify, integrate, and streamline all the business
processes, cost-effectively and easily.

Question 42. What Is Accounting Management ?

Answer :

Accounting Management (Business) is the practical application of management techniques to

control and report on the financial health of the organization. This involves the analysis, planning,
implementation, and control of programs designed to provide financial data reporting for
managerial decision-making. This includes the maintenance of bank accounts, developing
financial statements, cash flow, and financial performance analysis. Accounting management is a
mandatory knowledge module of any MBA program.

Accounting (IT) management: Accounting is often referred to as billing management. The goal is
to gather usage statistics for users.

Using the statistics the users can be billed and usage quota can be enforced.

Examples:

Disk usage
Link utilization
CPU time
Question 43. Explain Me What Is Executive Accounting ?

Answer :

Executive Accounting is designed for service type businesses that require a sophisticated
accounting system, yet simple to use accounting system. Executive Accounting contains many
advanced features such as three styles of invoicing (service, distribution and recurrent), multi-
currency capabilities, multiple bank account capabilities and other powerful features. Executive is
a single-user system that can be upgraded to an unlimited number of users.

Question 44. Explain What Are The Functions Of Accounting ?

Answer :

Accounting involves the creation of financial records of business transactions, flow of finance, the
process of creating wealth in an organization, and summarizing the financial position of a
business at a given moment in time.

Question 45. What Are The 4 Phases Accounting ?

Answer :

1. Recording

2. Classifying

3. Summarizing

4. Interpreting

Question 46. What Is Normative Accounting ?

Answer :

Normative Theory is a theory that prescribes how a process of accounting should be done. This
theory is not based on observation and may suggest radical changes to current practices in
accounting
Question 47. Who Uses Accounting ?

Answer :

Taxpayers like to use accounting

Question 48. What Are Accounting Entities ?

Answer :

Accounting entities are for example a business do not get these mixed up with legal entities

Question 49. What Are The Different Branches Of Accounting ?

Answer :

Following are different branches of accounting:

1.Cost Accounting

2. Financial Accounting

3.Management Accounting

Question 50. Why Do Users Of Accounting Information Need Accounting Information ?

Answer :
External users of accounting information (especially investors) use accounting information like
annual and quarterly reports to base their investing decisions on, and to compare different
companies with one another.

Internal users of accounting (mostly managers) use internal accounting information in order to
plan.

Question 51. What Is The Difference Of Cost Accounting And Financial Accounting ?

Answer :

Financial accounting encompasses all account presented on the face of the financial statement,
its presentation, recognition, measurement and disclosures. Where as cost accounting is only
focused on the cost of inventory.

Question 52. Explain Each Real Account And Nominal Account With Examples ?

Answer :

Real Account is an account of assets and Liabilities.

Types of Real account

Furniture Account
Land Account
Machinery Account
Building Account
Goodwill Account
Patents & Trade Marks Account.
Nominal Account is an account of incomes or expenses.

Types of Nominal account

Salary Account,
Commission Paid/Received Account,
Telephone Expenses Account,
Wages Account,
Printing & Stationery Account,
Interest Paid/Received Account.

ACCOUNTING BASICS QUESTIONS ANSWERS

1. Definition of accounting: “the art of recording, classifying and summarizing in a significant

manner and in terms of money, transactions and events which are, in part at least of a financial
character and interpreting the results there of”.
2. Book keeping: It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.
3. Concepts of accounting:
A. Separate entity concept
B. Going concern concept
C. Money measurement concept
D. Cost concept
E. Dual aspect concept
F. Accounting period concept
G. Periodic matching of costs and revenue concept
H. Realization concept.
4 Conventions of accounting:
A. Conservatism
B. Full disclosure
C. Consistency
D. Materiality

5. Systems of book keeping:

A. single entry system
B. double entry system

6. Systems of accounting:

A. Cash system accounting

B. Mercantile system of accounting.
7. Principles of accounting:
A. Personal a/c: Debit the receiver
Credit the giver

B. Real a/c: Debit what comes in

Credit what goes out
C. Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
8. Meaning of journal: Journal means chronological record of transactions.
9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business
enterprise whether real, nominal, personal.
10. Posting: It means transferring the debit and credit items from the journal to their respective
accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on a
particular date.
12. Credit note: The customer when returns the goods get credit for the value of the goods
returned. A credit note is sent to him intimating that his a/c has been credited with the value of
the goods returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him indicating
that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side of the
cashbook is known as the contra entry.
15. Petty cash book: Petty cash is maintained by business to record petty cash expenses of the
business, such as postage, cartage, stationery, etc.
16. Promisory note: an instrument in writing containing an unconditional undertaking signed by
the maker, to pay certain sum of money only to or to the order of a certain person or to the barer
of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six months
the cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by the bank
passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass
necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the revenue.
22. Capital income: The term capital income means an income which does not grow out of or
pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular business
transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the purpose of
obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business
transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an accounting period
but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on
credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of asset
due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property.
Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And
loss account when shown on the assets side in the balance sheet.
30. Intanglbe Assets: Intangible assets mean the assets which is not having the physical
appearance. And it’s have the real value, it shown on the assets side of the balance sheet.
31. Accrued Income: Accrued income means income which has been earned by the business
during the accounting year but which has not yet been due and, therefore, has not been received.
32. Outstanding Income: Outstanding Income means income which has become due during the
accounting year but which has not so far been received by the firm.
33. Suspense account: The suspense account is an account to which the difference in the trial
balance has been put temporarily.
34. Depletion: It implies removal of an available but not replaceable source, Such as extracting
coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to damage done to a building or other property during
tenancy.
37. Capital employed: The term capital employed means sum of total long term funds employed
in the business. i.e.
(Share capital+ reserves & surplus +long term loans – (non business assets + fictitious assets)
38. Equity shares: Those shares which are not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights are called pref. shares Pref.rights
in respect of fixed dividend. Pref.right to repayment of capital in the event of company winding
up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: the operating leverage takes place when a changes in revenue greater
changes in EBIT.
42. Financial leverage: it is nothing but a process of using debt capital to increase the rate of
return on equity
43. Combine leverage: It is used to measure of the total risk of the firm = operating risk +
financial risk.

44. Joint venture: A joint venture is an association of two or more the persons who combined for
the execution of a specific transaction and divide the profit or loss their of an agreed ratio.
45. Partnership: Partnership is the relation b/w the persons who have agreed to share the profits
of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives advances
against its receivables, from financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called capital reserve.
48. General reserve: the reserve which is transferred from normal profits of the firm is called
general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like surplus
cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders in a
subsidiary company.
51. Capital receipts: Capital receipts may be defined as “non-recurring receipts from the owner of
the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of
goods in the normal course of business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute money or
money’s worth to common stock and employs it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the company.
54. Types of a company:
1. Statutory companies
2. Government company
3. Foreign company
4. Registered companies:
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
D. private company
E. public company

55. Private company: A private co. is which by its AOA: Restricts the right of the members to
transfer of shares Limits the no. Of members 50. Prohibits any Invitation to the public to
subscribe for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain the
requisite restrictions to make it a private limited company, is called a public company.
57. Characteristics of a company:
> Voluntary association
> Separate legal entity
> Free transfer of shares
> Limited liability
> Common seal
> Perpetual existence.

58. Formation of company:

> Promotion
> Incorporation
> Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: It is the maximum amount of the share capital, which a company
can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the public for
subscriptions.
62. Subscribed capital: it is the part of the issued capital, which has been allotted to the public
63. Called up capital: It has been portion of the subscribed capital which has been called up by the
company.
64. Paid up capital: It is the portion of the called up capital against which payment has been
received.
65. Debentures: Debenture is a certificate issued by a company under its seal acknowledging a
debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.

67. Deemed public Ltd. Company: A private company is a subsidiary company to public company
it satisfies the following terms/conditions Sec 3(1)3:
1. Having minimum share capital 5 lakhs
2. Accepting investments from the public
3. No restriction of the transferable of shares
4. No restriction of no. of members.
5. Accepting deposits from the investors

68. Secret reserves: Secret reserves are reserves the existence of which does not appear on the
face of balance sheet. In such a situation, net assets position of the business is stronger than that
disclosed by the balance sheet.
These reserves are created by:
1. Excessive depot an asset, excessive over-valuation of a liability.
2. Complete elimination of an asset, or under valuation of an asset.

69. Provision: provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminutions in the value of assets or retained by way of providing for
any known liability of which the amount cannot be determined with substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose it was
originally made is also considered as reserve Provision is charge against profits while reserves is
an appropriation of profits Creation of reserve increase proprietor’s fund while creation of
provisions decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clearly investment
etc.,
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with some
other a/c or group of accounts so that the existence of the reserve is not known such reserve is
called an undisclosed reserve.
73. Finance management: Financial management deals with procurement of funds and their
effective utilization in business.

74. Objectives of financial management: financial management having two objectives that Is:
1. Profit maximization: The finance manager has to make his decisions in a manner so that the
profits of the concern are maximized.
2. Wealth maximization: Wealth maximization means the objective of a firm should be to
maximize its value or wealth, or value of a firm is represented by the market price of its common
stock.
75. Functions of financial manager:
> Investment decision
> Dividend decision
> Finance decision
> Cash management decisions
> Performance evaluation
> Market impact analysis

76. Time value of money: The time value of money means that worth of a rupee received today is
different from the worth of a rupee to be received in future.
77. Capital structure: It refers to the mix of sources from where the long-term funds required in a
business may be raised; in other words, it refers to the proportion of debt, preference capital and
equity capital.
78. Optimum capital structure: Capital structure is optimum when the firm has a combination of
equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of capital
computed by reference to the proportion of each component of capital as weights.
80. Financial break-even point: It denotes the level at which a firm’s EBIT is just sufficient to cover
interest and preference dividend.
81. Capital budgeting: Capital budgeting involves the process of decision making with regard to
investment in fixed assets. Or decision making with regard to investment of money in longterm
projects.
82. Payback period: Payback period represents the time period required for complete recovery of
the initial investment in the project.
83. ARR: Accounting or average rates of return means the average annual yield on the project.
84. NPV: The Net present value of an investment proposal is defined as the sum of the present
values of all future cash inflows less the sum of the present values of all cash out flows
associated with the proposal.

85. Profitability index: Where different investment proposal each involving different initial
investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows
equals the discounted cash out flow.
87. Treasury management: It means it is defined as the efficient management of liquidity and
financial risk in business.
88. Concentration banking: It means identify locations or places where customers are placed and
open a local bank a/c in each of these locations and open local collection canter.
89. Marketable securities: Surplus cash can be invested in short term instruments in order to earn
interest.
90. Ageing schedule: In an ageing schedule the receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): It is the maximum amount that banks can lend a
borrower towards his working capital requirements.
92. Commercial paper: A cp is a short term promissory note issued by a company, negotiable by
endorsement and delivery, issued at a discount on face value as may be determined by the
issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from commercial banks
for a short period pending disbursement of loans sanctioned by the financial institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new qualified
entrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of a
package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets and permits
its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of
business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to
overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up to certain
limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any
tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is called share
capital.
102. Funds flow statement: It is the statement deals with the financial resources for running
business activities. It explains how the funds obtained and how they used.
103. Sources of funds: There are two sources of funds internal sources and external sources.
Internal source: Funds from operations is the only internal sources of funds and some important
points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the following
items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed assets
External sources: (a) Funds from long-term loans
(b)Sale of fixed assets
(c) Funds from increase in share capital

104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax
liability (d) Payment of fixed liability

105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For example
6 months or less from another company which have surplus liquidity? Such deposits made by one
company in another company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt issued
by banks there is no prescribed interest rate on such CDs it is based on the prevailing market
conditions.
107. Public deposits: It is very important source of short term and medium term finance. The
company can accept PD from members of the public and shareholders. It has the maturity period
of 6 months to 3 years.
108. Euro issues: The euro issues means that the issue is listed on a European stock Exchange.
The subscription can come from any part of the world except India.
109. GDR (Global depository receipts): A depository receipt is basically a negotiable certificate,
dominated in us dollars that represents a non-US company publicly traded in local currency
equity shares.
110. ADR (American depository receipts): Depository receipts issued by a company in the USA are
known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated by the
securities Exchange commission (SEC) of USA like SEBI in India.

111. Commercial banks: Commercial banks extend foreign currency loans for international
operations, just like rupee loans. The banks also provided overdraft.
112. Development banks: It offers long-term and medium term loans including foreign currency
loans
113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect
assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs and persons possessing relevantexperience
and skills and entrepreneur traits.
115. Unsecured loans: It constitutes a significant part of long-term finance available to an
enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one period to
another.
117. Sources of cash:
Internal sources
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
External sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits

119. Budget: It is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.
120. Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results compared
with the forecasted and planned ones.
121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow over a
specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.
123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the level
of activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic method for
evaluating all operations and programmes, current of new allows for budget reductions and
expansions in a rational inner and allows reallocation of source from low to high priority
programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and balance
shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the causes of
difference between the two balances and pass necessary correcting or adjusting entries in the
books of the firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating the
Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense incurs
and revenue it earns.
130. Cost centre: A location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing costs for
determination of costs of products or services planning, controlling and reducing such costs and
furnishing of information management for decision making.
133. Elements of cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost
(C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also known
as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include cost of
indirect material indirect labour and indirect expenses incurred in factory. This cost is also known
as works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory cost, office
cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production to get
the total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may be
ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing (D)Operation
costing (E)Operating costing (F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b) direct costing (c) absorption costing (d)
uniform costing.
142. Standard costing: standard costing is a system under which the cost of the product is
determined in advance on certain predetermined standards.
143. Marginal costing: it is a technique of costing in which allocation of expenditure to production
is restricted to those expenses which arise as a result of production, i.e., materials, labour, direct
expenses and variable overheads.
144. Derivative: derivative is product whose value is derived from the value of one or more basic
variables of underlying asset.
145. Forwards: a forward contract is customized contracts between two entities were settlement
takes place on a specific date in the future at today’s pre agreed price.
146. Futures: A future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Future contracts are standardized exchange traded
contracts.
147. Options: An option gives the holder of the option the right to do something. The option
holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset by a
certain date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called expiration date.
152. European option: It is the option at exercised only on expiration date itself.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be summarized in
terms of what is known as cost of carry.
155. Initial margin: The amount that must be deposited in the margin a/c at the time of first
entered into future contract is known as initial margin.
156 Maintenance margin: This is somewhat lower than initial margin.
157. Mark to market: In future market, at the end of the each trading day, the margin a/c is
adjusted to reflect the investors’ gains or loss depending upon the futures selling price. This is
called mark to market.
158. Baskets: basket options are options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange cash flows in the
future according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects the costs
faced when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment funds. It
consists of two markets 1.primary market 2.secondary market.
163. Primary market: Those companies which are issuing new shares in this market. It is also
called new issue market.
164. Secondary market: Secondary market is the market where shares buying and selling. In India
secondary market is called stock exchange.
165. Arbitrage: It means purchase and sale of securities in different markets in order to profit
from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by price
fluctuations of securities held in a portfolio.
166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between figures
which are connected with each other in same manner.
167. Activity ratio: It is a measure of the level of activity attained over a period.
168. Mutual fund: A mutual fund is a pool of money, collected from investors, and is invested
according to certain investment objectives.
169. Characteristics of mutual fund: Ownership of the MF is in the hands of the of the investors
MF managed by investment professionals The value of portfolio is updated every day
170. Advantage of MF to investors: Portfolio diversification Professional management Reduction
in risk Reduction of transaction casts Liquidity Convenience and flexibility
171. Net asset value: the value of one unit of investment is called as the Net Asset Value
172. Open-ended fund: open ended funds means investors can buy and sell units of fund, at NAV
related prices at any time, directly from the fund this is called open ended fund.
173. Close ended funds: close ended funds means it is open for sale to investors for a specific
period, after which further sales are closed. Any further transaction for buying the units or
repurchasing them, happen, in the secondary markets.
174. Dividend option: investors who choose a dividend on their investments, will receive
dividends from the MF, as when such dividends are declared.
175. Growth option: investors who do not require periodic income distributions can be choose the
growth option.
176. Equity funds: equity funds are those that invest pre-dominantly in equity shares of
company.
177. Types of equity funds: Simple equity funds Primary market funds Sectoral funds Index funds
178. Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the equity
markets.
179. Index funds: The fund manager takes a view on companies that are expected to perform
well, and invests in these companies
180. Debt funds: the debt funds are those that are pre-dominantly invest in debt securities.
181. Liquid funds: the debt funds invest only in instruments with maturities less than one year.
182. Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and therefore
does not carry any credit risk.
183. Balanced funds: Funds that invest both in debt and equity markets are called balanced
funds.
184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the AMC
with prior approval of SEBI.
185. Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for managing
the investment portfolio.
186. AMC: the AMC describes Asset Management Company; it is the business face of the MF, as it
manages all the affairs of the MF.
187. R & T Agents: the R&T agents are responsible for the investor servicing functions, as they
maintain the records of investors in MF.
188. Custodians: Custodians are responsible for the securities held in the mutual fund’s portfolio.
189. Scheme takes over: if an existing MF scheme is taken over by another AMC, it is called as
scheme take over.
190. Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at the
price.
192. Market capitalization: market capitalization means number of shares issued multiplied with
market price per share.
193. Price earnings ratio: The ratio between the share price and the post tax earnings of company
is called as price earnings ratio.
194. Dividend yield: The dividend paid out by the company, is usually a percentage of the face
value of a share.
195. Market risk: It refers to the risk which the investor is exposed to as a result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk: It the risk which an investor has to face as a result of a fall in the interest
rates at the time of reinvesting the interest income flows from the fixed income security.
197. Call risk: Call risk is associated with bonds have an embedded call option in them. This option
hives the issuer the right to call back the bonds prior to maturity.
198. Credit risk: Credit risk refers to the probability that a borrower could default on a
commitment to repay debt or band loans
199. Inflation risk: Inflation risk reflects the changes in the purchasing power of the cash flows
resulting from the fixed income security.
200. Liquid risk: It is also called market risk, it refers to the ease with which bonds could be traded
in the market.
201. Drawings: Drawings denotes the money withdrawn by the proprietor from the business for
his personal use.
202. Outstanding Income: Outstanding Income means income which has become due during the
accounting year but which has not so far been received by the firm.
203. Outstanding Expenses: Outstanding Expenses refer to those expenses which have become
due during the accounting period for which the Final Accounts have been prepared but have not
yet been paid.
204. Closing stock: The term closing stock means goods lying unsold with the businessman at
the end of the accounting year.
205. Methods of depreciation:
1. Unirorm charge methods:
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods:
a. Diminishing balance method
b. Sum of years digits method
c. Double declining method
3. Other methods:
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.
206. Accrued Income: Accrued Income means income which has been earned by the business
during the accounting year but which has not yet become due and, therefore, has not been
received.

207. Gross profit ratio: it indicates the efficiency of the production/trading operations.
Formula : Gross profit
-------------------X100
Net sales
208. Net profit ratio: it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209. Return on share holders’ funds: it indicates measures earning power of equity capital.
Formula:
Profits available for Equity shareholders
-----------------------------------------------X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of earnings attributable to each equity
share.
Formula:
Profits available for Equity shareholders
----------------------------------------------
Number of Equity shares
211. Dividend yield ratio: it shows the rate of return to shareholders in the form of dividends
based in the market price of the share
Formula:
Dividend per share
---------------------------- X100
Market price per share

212. Price earnings ratio: it a measure for determining the value of a share. May also be used to
measure the rate of return expected by investors.
Formula: Market price of share (MPS)
------------------------------------X 100
Earnings per share (EPS)

213. Current ratio: it measures short-term debt paying ability.

Formula:
Current Assets
------------------------
Current Liabilities

214. Debt-Equity Ratio: it indicates the percentage of funds being financed through borrowings; a
measure of the extent of trading on equity.
Formula: Total Long-term Debt
---------------------------
Shareholders’ funds
215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate long-term funds
to meet its fixed assets requirements.
Formula: Fixed Assets
-------------------
Long-term Funds

216. Quick Ratio: The ratio termed as ‘liquidity ratio’. The ratio is ascertained y comparing the
liquid assets to current liabilities.
Formula:
Liquid Assets
------------------------
Current Liabilities

217. Stock turnover Ratio: The ratio indicates whether investment in inventory in efficiently used
or not. It, therefore explains whether investment in inventory within proper limits or not.
Formula: cost of goods sold
------------------------------
Average stock

218. Debtors Turnover Ratio: The ratio the better it is, since it would indicate that debts are being
collected more promptly. The ration helps in cash budgeting since the flow of cash from
customers can be worked out on the basis of sales.
Formula: Credit sales
----------------------------
Average Accounts Receivable

219. Creditors Turnover Ratio: It indicates the speed with which the payments for credit
purchases are made to the creditors.
Formula: Credit Purchases
-----------------------
 Average Accounts Payable

220. Working capital turnover ratio: It is also known as Working Capital Leverage Ratio. This ratio
indicates whether or not working capital has been effectively utilized in making sales.
Formula: Net Sales
----------------------------
Working Capital

221. Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments in fixed
assets contribute towards sales.
Formula: Net Sales
--------------------------
Fixed Assets

222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used for
paying dividend.
Formula: Dividend per Equity Share
--------------------------------------------X100
Earning per Equity share

223. Overall Profitability Ratio: It is also called as “Return on Investment” (ROI) or Return on
Capital Employed (ROCE). It indicates the percentage of return on the total capital employed in
the business.
Formula: Operating profit
------------------------X 100
Capital employed

The term capital employed has been given different meanings a.sum total of all assets Whether
fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed In the
business, i.e., share capital +reserves &surplus +long term loans – (non business assets +
fictitious assets). Operating profit means ‘profit before interest and tax’
224. Fixed Interest Cover ratio: The ratio is very important from the lender’s point of view. It
indicates whether the business would earn sufficient profits to pay periodically the interest
charges.
Formula: Income before interest and Tax
---------------------------------------
Interest Charges

225. Fixed Dividend Cover ratio: This ratio is important for preference shareholders entitled to get
dividend at a fixed rate in priority to other shareholders.
Formula: Net Profit after Interest and Tax
------------------------------------------
Preference Dividend

226. Debt Service Coverage ratio: This ratio is explained ability of a company to make payment of
principal amounts also on time.
Formula: Net profit before interest and tax
----------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship between the
proprietor’s funds and the total tangible assets.
Formula: Shareholders funds
------------------------------
Total tangible assets
228. Difference between joint venture and partnership: In joint venture the business is carried on
without using a firm name, In the partnership, the business is carried on under a firm name. In the
joint venture, the business transactions are recorded under cash system In the partnership, the
business transactions are recorded under mercantile system. In the joint venture, profit and loss
is ascertained on completion of the venture In the partnership, profit and loss is ascertained at
the end of each year. In the joint venture, it is confined to a particular operation and it is
temporary. In the partnership, it is confined to a particular operation and it is permanent.
229. Meaning of Working capital: The funds available for conducting day to day operations of an
enterprise. Also represented by the excess of current assets over current liabilities.
230. Concepts of accounting:
1. Business entity concepts: - According to this concept, the business is treated as a separate
entity distinct from its owners and others.
2. Going concern concept :- According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite period of time.
3. Money measurement concept :- This concept says that the accounting records only those
transactions which can be expressed in terms of money only.
4. Cost concept: - According to this concept, an asset is recorded in the books at the price paid to
acquire it and that this cost is the basis for all subsequent accounting for the asset.
5. Dual aspect concept: - In every transaction, there will be two aspects – the receiving aspect and
the giving aspect; both are recorded by debiting one accounts and crediting another account. This
is called double entry.
6. Accounting period concept: - It means the final accounts must be prepared on a periodic basis.
Normally accounting period adopted is one year, more than this period reduces the utility of
accounting data.
7. Realization concept: - According to this concepts, revenue is considered as being earned on the
data which it is realized, i.e., the date when the property in goods passes the buyer and he
become legally liable to pay.
8. Materiality concepts: - It is a one of the accounting principle, as per only important information
will be taken, and UN important information will be ignored in the preparation of the financial
statement.
9. Matching concepts: - The cost or expenses of a business of a particular period are compared
with the revenue of the period in order to ascertain the net profit and loss.
10. Accrual concept: - The profit arises only when there is an increase in owners capital, which is a
result of excess of revenue over expenses and loss.
231. Financial analysis: The process of interpreting the past, present, and future financial
condition of a company.
232. Income statement: An accounting statement which shows the level of revenues, expenses
and profit occurring for a given accounting period.
233. Annual report: The report issued annually by a company, to its share holders. it containing
financial statement like, trading and profit & lose account and balance sheet.
234. Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
235. Lease: Lease is a contract between to parties under the contract, the owner of the asset
gives the right to use the asset to the user over an agreed period of the time for a consideration.
236. Opportunity cost: The cost associated with not doing something.
237. Budgeting: The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.
238. Capital: The term capital refers to the total investment of company in money, tangible and
intangible assets. It is the total wealth of a company.
239. Capitalization: It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization: When a business is unable to earn fair rate on its outstanding securities.
241. Under capitalization: When a business is able to earn fair rate or over rate on it is
outstanding securities.
242. Capital gearing: The term capital gearing refers to the relationship between equity and long
term debt.
243. Cost of capital: It means the minimum rate of return expected by its investment.
244. Cash dividend: The payment of dividend in cash
245. Define the term accrual: Recognition of revenues and costs as they are earned or incurred. it
includes recognition of transaction relating to assets and liabilities as they occur irrespective of
the actual receipts or payments.
245. Accrued expenses: An expense which has been incurred in an accounting period but for
which no enforceable claim has become due in what period against the enterprises.
246. Accrued revenue: Revenue which has been earned is an earned is an accounting period but
in respect of which no enforceable claim has become due to in that period by the enterprise.
247. Accrued liability: A developing but not yet enforceable claim by another person which
accumulates with the passage of time or the receipt of service or otherwise. It may rise from the
purchase of services which at the date of accounting have been only partly performed and are
not yet billable.
248. Convention of Full disclosure: According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant information will be
made.
249. Convention of consistency: According to this convention it is essential that accounting
practices and methods remain unchanged from one year to another.
250. Define the term preliminary expenses: Expenditure relating to the formation of an
enterprise. There include legal accounting and share issue expenses incurred for formation of the
enterprise.
251. Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be fixed
charge and floating charge.
252. Appropriation: It is application of profit towards Reserves and Dividends.
253. Absorption costing: A method where by the cost is determine so as to include the
appropriate share of both variable and fixed costs.
254. Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a product.
It is also called variable cost.
255. What are the ex-ordinary items in the P&L a/c: The transaction which is not related to the
business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on the
sale of fixed assets, interest received from other company investments, profit or loss on foreign
exchange, unexpected dividend received.
256. Share premium: The excess of issue of price of shares over their face value. It will be
showed with the allotment entry in the journal; it will be adjusted in the balance sheet on the
liabilities side under the head of “reserves & surplus”.
257. Accumulated Depreciation: The total to date of the periodic depreciation charges on
depreciable assets.
258. Investment: Expenditure on assets held to earn interest, income, profit or other benefits.
259. Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid up
share capital in corporate enterprise.
260. Capital Work In Progress: Expenditure on capital assets which are in the process of
construction as completion.
261. Convertible Debenture: A debenture which gives the holder a right to conversion wholly or
partly in shares in accordance with term of issues.
262. Redeemable Preference Share: The preference share that is repayable either after a fixed
(or) determinable period (or) at any time dividend by the management.
263. Cumulative preference shares: A class of preference shares entitled to payment of emulates
dividends. Preference shares are always deemed to be cumulative unless they are expressly
made non-cumulative preference shares.
264. Debenture redemption reserve: A reserve created for the redemption of debentures at a
future date.
265. Cumulative dividend: A dividend payable as cumulative preference shares which it unpaid
Emulates as a claim against the earnings of a corporate before any distribution is made to the
other shareholders.
266. Dividend Equalization reserve: A reserve created to maintain the rate of dividend in future
years.
267. Opening Stock: The term ‘opening stock’ means goods lying unsold with the businessman in
the beginning of the accounting year. This is shown on the debit side of the trading account.
268. Closing Stock: The term ‘Closing Stock’ includes goods lying unsold with the businessman at
the end of the accounting year. The amount of closing stock is shown on the credit side of the
trading account and as an asset in the balance sheet.
269. Valuation of closing stock: The closing stock is valued on the basis of “Cost or Market prices
whichever is less” principle.
272. Contingency: A condition (or) situation the ultimate out comes of which gain or loss will be
known as determined only as the occurrence or non occurrence of one or more uncertain future
events.
273. Contingent Asset: An asset the existence ownership or value of which may be known or
determined only on the occurrence or non occurrence of one more uncertain future event.
274. Contingent liability: An obligation to an existing condition or situation which may arise in
future depending on the occurrence of one or more uncertain future events.
275. Deficiency: the excess of liabilities over assets of an enterprise at a given date is called
deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend, reserves.
278. Appropriation Assets: An account sometimes included as a separate section of the profit and
loss statement showing application of profits towards dividends, reserves.
279. Capital redemption reserve: A reserve created on redemption of the average cost: - the cost
of an item at a point of time as determined by applying an average of the cost of all items of the
same nature over a period. When weights are also applied in the computation it is termed as
weight average cost.
280. Floating Change: Assume change on some or all assets of an enterprise which are not
attached to specific assets and are given as security against debt.
281. Difference between Funds flow and Cash flow statement: A Cash flow statement is
concerned only with the change in cash position while a funds flow analysis is concerned with
change in working capital position between two balance sheet dates. A cash flow statement is
merely a record of cash receipts and disbursements. While studying the short-term solvency of a
business one is interested not only in cash balance but also in the assets which are easily
convertible into cash.
282. Difference between the Funds flow and Income statement:
A funds flow statement deals with the financial resource required for running the business
activities. It explains how were the funds obtained and how were they used, whereas an income
statement discloses the results of the business activities, i.e., how much has been earned and
how it has been spent. A funds flow statement matches the “funds raised” and “funds applied”
during a particular period. The source and application of funds may be of capital as well as of
revenue nature. An income statement matches the incomes of a period with the expenditure of
that period, which are both of a revenue nature.

Revenue Deferral Journal Entry

The original cash entry is posted to the revenue account. The adjusting entry is between a
revenue and a liability account.

Debit Credit
Account
Revenue XXX

Deferred revenue XXX

 Revenue deferral journal

The deferred revenue journal entry example establishes a liability account in the balance sheet,
the liability is sometimes referred to as the unearned revenue account.

Expenses Accrual Journal Entry

The adjusting entry is between an expense and a liability account.

Debit Credit
Account
Expense XXX

Expense accrual XXX

Expense accrual journal

The journal entry for accrued expenses establishes a balance sheet liability account.

Expenses Deferral Journal Entry

The original cash entry is to an expense account. The adjusting entry is between an expense and
a liability account.

Debit Credit
Account
Expense deferred XXX

Expense XXX

Expense deferral journal

The deferred expenditure journal entry establishes an asset account in the balance sheet.

Deferred or Prepaid Expenses

It should be noted that in relation to expenses the term deferral is often used interchangeably
with the term prepayment. Generally, a deferred expense is one which has been paid more than a
one year in advance and is shown as a long term asset in the balance sheet, whereas a prepaid
expense or prepayment is an expense which has been paid less than one year in advance and is
therefore shown as a current asset in the balance sheet.