Let’s Explore 26 Essential Accounting Interview Questions
What is the difference between cash accounting and accrual accounting?
Answer: Accrual accounting is where income and expenses are recorded when they are earned or incurred and not when the cash is received or paid. Cash accounting records transactions when cash is received or paid, generally.
Example: There is a service rendered in March and payment is received in April. Under accrual accounting, the income is recorded in March and under cash accounting, in April.
What is the difference between outstanding expenses and prepaid expenses?
Answer: Outstanding Expenses are those expenses which are incurred but not paid yet. Prepaid expenses are expenses paid in the current period that will be paid in the future.
Example: Salary which is due but not paid is an outstanding expense and insurance paid for the next year is a prepaid expense.
What is accrued income?
Answer: Accrued income is income that has been earned but has not yet been received.
Example: If interest has been earned for March but will be received in April, it is treated as accrued income for March.
What is a provision in accounting?
Answer: A provision is an amount recognised to provide for a known liability or expected loss where the timing or amount of the liability is uncertain.
Example: Provision for doubtful debts is created when some customer receivables may not be collected.
What is the difference between provision and reserve?
Answer: A provision is generally created to account for an expected liability or loss. A reserve is generally an appropriation of profit retained in the business for a specific or general purpose.
Example: Provision for doubtful debts is created against expected losses, whereas a general reserve may be created out of profits to strengthen the financial position of the business.
What are bad debts?
Answer: Bad debts are amounts which is owed by customers that business is unable to recover.
Example: If a customer owes ₹20,000 but the amount becomes irrecoverable, it is treated as a bad debt.
What is the difference between gross profit and net profit?
Answer: Gross profit is the excess of revenue from operations over the cost of goods sold. Net profit is the profit left after deducting operating expenses, finance costs, depreciation, taxes and other applicable expenses from the income.
Example: If sales are ₹12 lakh and the cost of goods sold is ₹7 lakh, the gross profit is ₹5 lakh. After deducting other expenses, the remaining amount represents net profit.
What is Cost of Goods Sold (COGS)?
Answer: Cost of Goods Sold is the direct cost associated with the goods sold during a given period.
A commonly used formula is:
COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock
What is the difference between gross profit and gross loss?
Answer: A gross profit arises when sales revenue is higher than the cost of goods sold. A gross loss occurs when the cost of goods sold is higher than the relevant sales revenue.
What is a contra entry?
Answer: A contra entry is an accounting entry which involves both cash and bank accounts.
Example: When ₹10,000 is deposited from cash into the business bank account, Cash is credited and Bank is debited.
What is a petty cash book?
Answer: A petty cash book is used to record small and routine business expenses.
Example: Expenses such as postage, local conveyance, tea and stationery can be recorded through petty cash.
What is a suspense account?
Answer: A suspense account is a temporary account to record transactions until the correct accounting treatment or account can be determined. After the error or uncertainty is removed, the amount is credited to the relevant account.
What is a contingent liability?
Answer: A contingent liability is an obligation that may or may not be incurred depending on the outcome of a future uncertain event.
Example: A pending legal claim may result in an obligation if the case is decided against the business.
What is a contingent asset?
Answer: A contingent asset is a possible asset that depends on the occurrence or non-occurrence of a future uncertain event.
Example: A business may have a potential claim for compensation that depends on the outcome of a legal case.
What is goodwill?
Answer: Goodwill is an intangible asset. It is the value of factors like reputation, customer relationships and other business advantages that may help a business earn higher returns.
Example: A well-established business may have goodwill because of its strong reputation and loyal customer base.
What are intangible assets?
Answer: Intangible assets are identifiable non-physical assets that provide economic benefits to a business.
Examples: Patents, copyrights, trademarks and certain software rights.
What is inventory?
Answer: Inventory means assets held for sale in the ordinary course of business, works in process for such sale or materials and supplies to be consumed in production or rendering of services.
Example: For a retailer, goods purchased for resale are inventory.
What is the difference between current assets and non-current assets?
Answer: Current assets are assets expected to be realised, sold or consumed within the normal operating cycle or within the applicable short-term period. Non-current assets are assets held for longer-term use or benefit.
Examples: Cash, trade receivables and inventory are generally current assets, while property, plant and equipment are generally non-current assets.
What is the difference between current liabilities and non-current liabilities?
Answer: Current liabilities are obligations expected to be settled within the normal operating cycle or within the applicable short-term period. Non-current liabilities are obligations due beyond that period.
Examples: Trade payables and short-term obligations are generally current liabilities, while long-term borrowings are generally non-current liabilities.
What is the difference between capital and drawings?
Answer: Capital means the money which the owner puts into the business. Drawings mean the cash, goods or other assets taken out by the owner for personal use.
Example: If an owner invests ₹5 lakh in the business, it increases capital. If the owner withdraws ₹20,000 for personal use, it is treated as drawings.
What is a cash discount?
Answer: A cash discount refers to a reduction offered to encourage the customer to make payment within a specific time.
Example: A business may offer a 2% discount if a customer pays an invoice within 10 days.
What is a trade discount?
Answer: A trade discount is a discount offered by a seller from the list or catalogue price based on such things as quantity purchased or business arrangements.
Example: A wholesaler may offer a 10% trade discount to a retailer on the listed price of goods.
What is the difference between a cash discount and a trade discount?
Answer: A trade discount is generally deducted from the listed price at the time of sale, while a cash discount is generally offered to encourage timely payment.
Example: A seller gives a 10% trade discount on an invoice and an additional 2% cash discount if payment is made within the specified period.
What is a credit note?
Answer: A credit note is a document issued by a seller to a customer to reduce the amount payable against an invoice.
Example: A credit note may be issued when goods are returned by the customer.
What is a debit note?
Answer: A debit note is a document used to communicate an increase in the amount payable or to record certain adjustments between a buyer and seller.
Example: A buyer may issue a debit note to a supplier when goods are returned.
What is the difference between operating and non-operating income?
Answer: Operating income is income generated from the main activities of a business. Non-operating income arises from activities outside the primary operations of the business.
Example: Sales revenue is operating income for a trading business, while interest income may be classified as non-operating income.