Accountant interview questions

The accounting equation is Assets = Liabilities + Equity.

• Assets are resources the business controls, such as cash, inventory, and equipment.
• Liabilities are obligations to outsiders, such as supplier balances and loans.
• Equity is the owners' residual interest after liabilities are deducted from assets.
• A correctly recorded transaction keeps both sides equal.

A transaction changes at least two accounts so total assets still equal liabilities plus equity.

• Buying equipment for cash increases equipment and decreases cash by the same amount.
• Buying supplies on credit increases an asset and accounts payable equally.
• Earning cash revenue increases cash and equity through profit.
• Paying an expense decreases cash and equity through profit.

Debit means the left side of an account and credit means the right side.

• A debit is not automatically good, bad, positive, or negative.
• Debits increase assets and expenses but decrease liabilities, equity, and revenue.
• Credits increase liabilities, equity, and revenue but decrease assets and expenses.
• Every journal entry must have equal total debits and credits.

Assets normally carry debit balances, while liabilities and equity normally carry credit balances.

• Cash and accounts receivable increase with debits and decrease with credits.
• Accounts payable and loans increase with credits and decrease with debits.
• Contributed capital and retained earnings normally have credit balances.
• A balance opposite to the normal side can be valid, but it should be understood and supported.

Revenue normally has a credit balance, while expenses and dividends normally have debit balances.

• Revenue credits increase current profit and ultimately increase retained earnings.
• Expense debits reduce current profit and ultimately reduce retained earnings.
• Dividend or owner withdrawal debits reduce equity but are not business expenses.
• These temporary accounts are closed into retained earnings at period end.

Double-entry bookkeeping records every transaction with equal debits and credits across at least two accounts.

• A cash sale debits cash and credits revenue.
• Paying a supplier debits accounts payable and credits cash.
• The method preserves the accounting equation after each entry.
• Balanced debits and credits are necessary, although they do not prove every account choice is correct.

A journal is the chronological record where transactions are first entered as debits and credits.

• Each entry normally includes the date, affected accounts, amounts, and a short description.
• The entry should reference support such as an invoice, receipt, or payroll register.
• A general journal handles entries that are not captured through specialized sales, purchases, or cash journals.
• Journal entries are later posted to the relevant ledger accounts.

The general ledger is the complete set of accounts that holds the organization's recorded balances and activity.

• It groups transactions by account, such as cash, revenue, rent expense, or accounts payable.
• Each account shows opening balance, posted debits and credits, and closing balance.
• Financial statements are prepared from general ledger balances.
• Control accounts in the ledger summarize detailed subledgers such as accounts receivable.

Posting means transferring each journal entry amount to the corresponding general ledger accounts.

• The debit side of the journal entry goes to the debit side of the named account.
• The credit side goes to the credit side of its named account.
• Dates and references connect the ledger movement back to the original journal entry.
• After posting, each ledger account has an updated running or period-end balance.

A trial balance lists all general ledger balances at a point in time and compares total debits with total credits.

• Debit-balance accounts and credit-balance accounts are shown in separate columns.
• Equal totals confirm the ledger is arithmetically balanced.
• An unadjusted trial balance is prepared before period-end adjustments.
• An adjusted trial balance is the main basis for preparing financial statements.

A balanced trial balance cannot reveal errors that leave total debits equal to total credits.

• A completely omitted transaction does not disturb either total.
• Posting the correct amount to the wrong account can still balance.
• Recording the same incorrect amount on both sides can still balance.
• Two offsetting errors can cancel each other's effect on the totals.

Cash-basis accounting records cash when it moves, while accrual accounting records economic activity when it is earned or incurred.

• Under cash basis, a customer payment triggers revenue even if the work occurred earlier.
• Under accrual basis, revenue is recorded when the performance obligation is satisfied.
• Accrual accounting records expenses when resources are consumed or obligations arise, not only when paid.
• Accrual basis therefore uses receivables, payables, prepayments, and accruals to report the period more faithfully.

Adjusting entries place revenue and expenses in the correct period before financial statements are issued.

• They record activity not yet captured by routine cash or invoice processing.
• Common adjustments cover accruals, prepayments, deferred revenue, and depreciation.
• They update both an income statement account and a balance sheet account in many cases.
• They normally do not record a new cash receipt or payment.

Accrued revenue is revenue already earned but not yet billed or collected.

• The adjustment debits an accrued receivable or contract asset and credits revenue.
• Interest earned through month-end but payable next month is a common example.
• The entry places revenue in the period when the earning activity occurred.
• Later billing or collection clears the receivable rather than creating the same revenue again.

An accrued expense is a cost already incurred but not yet invoiced or paid.

• The adjustment debits the relevant expense and credits an accrued liability.
• Wages earned by employees before month-end but paid next month are a common example.
• The entry recognizes both the period's cost and the obligation outstanding at period end.
• Payment later reduces the liability instead of recording the expense a second time.

A prepaid expense is a payment recorded as an asset until the related benefit is consumed.

• Paying a 12-month insurance premium initially debits prepaid insurance and credits cash.
• Each month, the used portion is debited to insurance expense and credited from the prepaid asset.
• The remaining asset represents future coverage still available to the business.
• The allocation period should follow the contract or another supportable consumption pattern.

Unearned revenue is cash received before the business has earned the revenue.

• The initial receipt debits cash and credits a contract liability or deferred revenue account.
• An annual subscription paid in advance is a common example.
• Revenue is recognized as the promised service or goods are delivered.
• The liability represents the remaining obligation to the customer.

A reversing entry cancels a selected prior-period adjusting entry at the start of the next period.

• It is commonly used for accrued wages, accrued interest, or other short-term accruals.
• Reversal lets the normal invoice or payroll entry be recorded without manually removing the old accrual.
• The reversal uses the same accounts and amounts as the adjustment with debit and credit swapped.
• Depreciation and most prepaid expense allocations are generally not reversed.

Revenue is recognized when the entity satisfies its promise to transfer goods or services to a customer.

• Cash collection alone does not determine when revenue is recorded under accrual accounting.
• The recognized amount reflects the consideration the entity expects for the transferred goods or services.
• A product sale is often recognized at delivery when control passes to the customer.
• A service provided over time may produce revenue over the service period if the criteria are met.

Expenses are recognized in the period when resources are consumed or economic benefits are used to generate activity.

• Direct costs such as cost of goods sold are recognized with the related sale.
• Period costs such as monthly rent are recognized in the period they support.
• A long-lived asset's cost is allocated through depreciation rather than expensed entirely on purchase.
• Accruals and prepayments correct differences between payment timing and consumption.