All Accounting

what is the Accounting Ratios?
Accounting Ratio is used to describe the relationship between amounts or figures shown in either
balance sheet, profit, and loss statement or any other financial statement document which is part of an
accounting organization, thereby aiding financial analysis of the company and depicting its performance
level.
Types of Accounting Ratios
There are various types of accounting ratios used by various interested stakeholders to analyze the
financial statements of the company. All the accounting ratios can be aptly bifurcated into four different
categories as stated below.
1. Liquidity Ratios
2. Profitability Ratios
3. Activity Ratios
4. Leverage Ratios
Note!! : That the categories in which accounting ratios are explained below do not in any way portray
the order of importance.
Example #1 – Liquidity Ratios
Also referred to as Balance Sheet ratios, liquidity ratios are further branched out into the Current Ratio,
Quick Ratio, and Cash Ratio. The main objective of any liquidity ratio is to measure the company’s short
term solvency status of the company. It states the company’s efficiency and capability in paying off its
current liabilities and debts by utilizing its current assets.
The formula to derive the aforementioned ratios are given below:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Cash Ratio = Cash + Marketable Securities / Current Liabilities
Example #2 – Profitability Ratios
Profitability Ratios measure the company’s capability and efficiency in utilizing its capital in order to
generate revenue and ultimately profits. Generally represented in % terms, it represents the relation of
the unit in terms of % of sales.
Gross Profit Ratio = (Gross Profit / Net Sales) * 100

Net Profit Ratio = (Net Profit / Net Sales) * 100
Operating Expense Ratio = ((Cost of Goods Sold + Operating Expense) / Net Sales) * 100
Return on Capital Employed = (Profit before Interest and Taxes / Capital Employed) * 100
Example #3 – Activity Ratios
Activity Ratios measure the company’s capability of managing and converting its assets into revenue and
cash. It shows the company’s efficiency in utilizing its assets in order to generate revenue.
Inventory Turnover Ratio:
This ratio measures the times taken to convert inventory in sales.
Debtors Turnover Ratio:
This ratio indicates how efficiently or what is the time taken for credit debtors to get converted into cash
Total Assets Turnover Ratio: This ratio measures the efficiency with which the assets are managed by the
company to generate revenue.
Fixed Assets Turnover Ratio: This ratio measures the efficiency with which the fixed assets are managed
by the company to generate revenue.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Debtors Turnover = Net Sales / Average Debtors
Total Assets Turnover = Sales / Average Total Assets
Fixed Assets Turnover = Sales / Average Fixed Assets
Accounting for you learning, [17-Apr-22 9:25 PM]
Example #4 – Leverage Ratios
Like liquidity ratios are used to understand the company’s short term solvency aspect, leverage ratio
help in determining the long term solvency aspects of the company. Further bifurcated into the
following ratios:
Debt to Equity Ratio: It is the relationship between the total debts taken by the company viz a viz the
total equity employed by the company. Used to measure the company’s leverage capacity, usually, a low
debt to equity ratio would indicate good financial security held by the company.Debt Ratio: This ratio
explains the relationship between the total liabilities of the company in comparison to the total assets
held by the company.Proprietary Ratio: This ratio explains the relationship between the total
shareholder funds of the company being invested in total assets held by the company.
Debt Equity Ratio = Total Debt / Total Equity
Debt Ratio = Total Liabilities / Total Capital
Proprietary Ratio = Shareholders Funds / Total Assets
Accounting for you learning, [21-Apr-22 7:56 PM]
WHAT ARE DIVIDEND STOCKS?
Dividend stocks refer to companies that release a portion of their net profit back to shareholders in the
form of a cash dividend. Companies that issue regular dividends can be desirable for investors because
they stand to benefit from any price appreciation as well as dividend income.
dividend stocks explained
Additionally, dividend stocks can attract a lot of attention from individual investors as well as asset
managers because a regular dividend may be a sign of a financially stability. After all, for a company to
return a portion of its profits to its shareholders there had to have been profits in the first place; and a
long-term track record of dividend payments may highlight a company’s history of profitability.
Dividends tend to be paid out four times a year (quarterly) but can also be paid annually, semi-annually,
monthly or whenever viable in the case of ‘irregular’ dividends.
To calculate the dividend yield take a share’s annual dividend per share and divide it by the price per
share
Dividend yield = Annual dividend per share/ Price per share.
Accounting for you learning, [23-Apr-22 7:51 AM]
What is Break-even Point?
Break-even point (BEP) is a term in accounting that refers to the situation where a company’s revenues
and expenses were equal within a specific accounting period. It means that there were no net profits or
no net losses for the company – it “broke even”. BEP may also refer to the revenues that are needed to
be reached in order to compensate for the expenses incurred during a specific period.
Break-Even Point (BEP)
For example, Company ABC spent $100,000 on manufacturing costs and also acquired revenues worth
$100,000. In such a case, the company only achieved its break-even point, which means it didn’t lose
anything, but it didn’t earn anything either.
Accounting Break-even Point vs. Financial Break-even Point
There are several differences between the accounting break-even point and the financial break-even
point.
Accounting break-even point, on the one hand, is the easiest and most common method of analyzing
profits. It is easily calculated by taking the total expenses on a particular production and computing how
many units of the product need to be sold in order to cover the expenses.
Financial break-even point, on the other hand, is more complicated to measure because it uses different
measurements, even though it is the same concept. It doesn’t address a specific product or units
number, but instead, a company’s earnings, specifically about how much it needs to earn in order that
its earnings per share are equal to zero. Earnings mean the gross amount of money earned by the
company before taxes and expenses are taken out.
What is Contribution Margin in Relation to Break-even Point?
The term contribution margin is often heard in relation to the break-even point. It refers to the actual
profit a business can earn from every single unit sold. It is understood to be the product’s price, less the
variable costs. Often, experts say the contribution margin shows the real profit and not the revenue.
How to Calculate for Break-even Point
There are two ways to compute for the break-even point – one is based on units and the other is based
in dollars.
To compute for the break-even point in units, the following formula is followed:
Break-even Point (Units) = Fixed Costs / (Revenue Per Unit – Variable Cost Per Unit)
That’s the accounting break-even.
To compute for break-even point in dollars, the following formula is followed:
Break-even Point (Sales in dollars) = Fixed Costs / (Sales Price per Unit x BEP in Units
That’s the financial break-even.
Where:
Fixed Costs are the costs that are independent of the volume of sales, such as rent
Variable Costs are the costs that are dependent on the volume of sales, such as the materials needed for
production or manufacturing
Factors that Increase a Company’s Break-even Point

It is important to calculate a company’s break-even point in order to know their minimum target to
cover their production expenses. However, there are times when BEP increases or decreases, depending
on certain factors. Here are some of the factors:
1. Increase in customer sales
When there is an increase in customer sales, it means that there is higher demand. A company then
needs to produce more of its products to meet this new demand which, in turn, raises the BEP in order
to cover the extra expenses.
2. Increase in production costs
The hard part of running a business is when customer sales or product demand remains the same while
the price of variable costs increases, such as the price of raw materials. When that happens, the BEP also
goes up because of the additional expense. Aside from production costs, other costs that may increase
include rent for a warehouse, increases in salaries for employees, or higher utility rates.
3. Equipment repair
In cases where the production line falters, or a part of the assembly line breaks down, the BEP increases
since the target number of units is not produced within the desired time frame. Equipment failures also
mean higher operational costs and, therefore, a higher break-even.
How to Reduce the Break-even Point
In order for a business to generate higher profits, the BEP must be lowered. Here are the most effective
ways of reducing it.
1. Raise product prices
This is something that not all business owners want to do without hesitation, fearful that it may make
them lose some customers.
2. Go for outsourcing
Profitability may be increased when a business opts for outsourcing, which can help reduce
manufacturing costs when production volume increases
Profit and Loss Accounting
Definition of Profit and Loss Accounting
Profit and loss accounting can be defined as a statement prepared at the end of an accounting period,
usually a year or quarter which summarizes all revenue nature transactions like revenue earned, various
costs and expenses incurred, providing insights into the company’s ability or inability to earn profits,
revenue and cost trends during that period and is also known by various other terminologies like profit
and loss statement, income statement, statement of operations or statement of financial results
Explanation
Profit and loss accounting is a financial statement that summarizes all costs, revenue and expenses
incurred during the financial period. It is one of the major components of financial statements which
every public company issues quarterly or yearly along with other two statements like balance sheet and
cash flow statements. This statement calculates and quantifies the value of profit or loss earned by the
business during a period and hence is the most commonly used financial statement. Profit and loss
statements provide user information regarding the top and bottom line of the organisation. It starts with
the entry of revenue which is known as the top line, and subtracts the expenses like the cost of goods
sold, tax expenses, operating expenses, interest expenses and other extraordinary expenses. The
difference between both is known as the bottom line or the net income of the organisation.
It is quite important to have a comparison between income statements of different accounting periods
as the change in operating cost, research and development expenses, revenues and net earnings over
time is more useful instead of studying and analysing single year figures. Profit and loss accounting is
said to be one of the most important tools for monitoring the organisation’s financial health. It depicts
the organisation’s realized profits and losses for an accounting period by comparing the company’s total
revenue with the total cost and expenses. Intra and inter-firm comparison can help stakeholders
monitor the company’s ability to increase profits by increasing the revenue or decreasing costs.
Investors, accountants, and analysts study the profit and loss accounts to scrutinise the company’s debt
financing and cash flow. Depending upon the applicable GAAP, companies are required to prepare and
presents their Profit and Loss Accounting statement.
The main components of a profit and loss account are –
RevenueCost of goods soldSelling administrative and general expensesMarketing and advertising

expensesTechnology, research and development expensesInterest expensesTax expensesNet income
Examples of Profit and Loss Accounting
Below is a profit and loss account of Orange Inc. for the year ended on 31 March 2020
Mercedice Inc.
Consolidated Statement of Operations
Particulars 20202019
Net Sales 1,40,0001,00,000
Net Service 60,00040,000
Total Net Sales (A)2,00,0001,40,000
Operating Expenses:Cost of Goods Sold 1,00,00080,000
Fulfilmentb 25,00018,000
Marketing10,0008,000
Research and Development 20,00012,000
General and Administrative 4,0003,000
Other Operating Expenses500300 Total Operating Expenses (B)1,59,5001,21,300
Operating Income (C) = (A-B)40,50018,700
Interest Income1,500700
Interest Expense-3,000-1,500
Other Income and Expenses Net800200Total Non-Operating Income and Expenses-700-600 Income
Before Income Tax 39,80018,100
Provision for Income Tax 4,8002,100
Net Income 35,00016,000
Example #2
from The Below Mentioned Information, Draw P&l A/c and Derive Net Profit/loss:
ParticularsAmount ($)Purchases 10,00,000 Opening Stock1,00,000 Closing Stock 1,50,000
Freight 20,000
Gross Sales 15,00,000
Bad Debts 10,000
Adm. Expenses 2,00,000
Selling and D Bs. Exp.30,000 Dividend Distributed to Equity Share Holders15,000
Solution:
Profit and Loss A/c
ParticularsAmount ($)Sales15,00,000
Change in Stock(cl. – Op. Stock)50,00015,50,000 Less:Purchases10,00,00
Freight20,000
Adm. Expenses2,00,000
Selling and D Bs. Exp.30,000
Bad Debts10,000
Total Expenses12,60,000
Net Profit Before Tax (A)2,90,000Tax @ 30% (B)87,000 Net Profit After Tax (C) = (A-B)2,03,000
Note: Dividend distributed to equity shareholders is not an expense but a distribution of profit.
Therefore, it is not reduced from profits balance.
Importance of Profit and Loss Accounting
Every Businessman and concerned stakeholders are interested in knowing the results of operations, i.e.
whether business operations have earned profits or is incurring losses. Businesses measure and present
their income performance with the help of a financial statement known as a profit and loss account. This
account lists all the revenue sales, cost of goods sold, expenses and any other expense generated by the
company for the given period. The profit and loss account provides knowledge about the business
income and expenses net, showing profit or loss. It helps the owner or management evaluate the
business’s performance and provides a base for future performance forecast and growth analysis. It also
presents important information required by the banks in order to sanction loans. Profit and loss account
elaborate various business activities such as expenses and revenues, which are the most useful risk
assessment, cost trend analysis, future income analysis.
It also helps in determining the tax obligations of the business. Net income is the amount which is left
after subtracting all the cost of goods sold, operating, non-operating costs for the period. Various
stakeholders also use net income in their financial statement analysis. For example, a company will
present negative earnings if its expenses incurred during a period are higher than the income earned.
Investors use this statement to analyse return generation capability of an entity, creditors and capital
funding organizations like bank looks at p&l a/c for determining its repayment capacity, govt
organization looks at p&l a/c for ensuring correct tax payments etc.
Advantages of Profit and Loss Accounting
Some of the advantages are given below:
Tracks the Net Profit or Net Loss – The Most important benefit of preparing a profit and loss account is
to track business performance in terms of net profit or a net loss.Tracks Indirect Expenses – Indirect
expenses of a particular period can be easily tracked and monitored with the help of data provided in a
profit and loss account and thus can help in lowering or minimising the excess expenses, thereby
increasing profitability.Helps in Ascertaining the Net Profit Ratios – This statement helps in conducting
financial statement analysis as with the help of net profit, a company may easily determine the net
profit linked ratios.Helps in Decision Making – With the help of profit and loss statements, comparison
can be done between the current year’s data with previous year data and then forecasting the future
performance and thus helps in making future plans and decision-making.
Disadvantages of Profit and Loss Accounting
Some of the disadvantages are given below:
Not a Complete Picture: Financial decisions based solely on profitability analysis may not be appropriate
as one also needs to understand its financial position, the value of risk undertaken etc.No Insights of
Cash Generated Neither of any item presented in p&l a/c depicts actual cash inflows/ outflows.
management also needs to know the organization’s cash position. p&l a/c cannot serve this
management’s need. Accordingly, they need to prepare a cash flow statement.Period of Reporting: P&l
A/c is based on historical data. Sometimes it might be late for stakeholders for decision making and may
result in an incorrect decision.
Conclusion
WHAT IS A STATEMENT OF CASH FLOWS?
A cash flow statement is a financial report that details how cash entered and left a business during a
reporting period.
According to the online course Financial Accounting: “The purpose of the statement of cash flows is to
provide a more detailed picture of what happened to a business’s cash during an accounting period.”
Since the cash flow statement provides insight into different areas a business used or received cash, it’s
an important financial statement when it comes to valuing a company and understanding how it
operates.
A typical cash flow statement comprises three sections: cash flow from operating activities, cash flow
from investing activities, and cash flow from financing activities.
HOW TO CREATE A CASH FLOW STATEMENT
1. Determine the Starting Balance:
The first step in preparing a cash flow statement is determining the starting balance of cash and cash
equivalents at the beginning of the reporting period. This value can be found on the income statement
from the same period.
The starting cash balance is necessary if you leverage the indirect method of calculating cash flow from
operating activities. If you instead use the direct method, this step isn’t required.
2. Calculate Cash Flow from Operating Activities:
Next, you need to calculate cash flow from operating activities. This is typically thought of as the most
important section, as it shows how much cash was generated from a business’s actual operations. Cash
flow from operations can be calculated using either the direct or indirect method.
Direct Method :
The direct method of calculating cash flow from operating activities is straightforward and involves
taking all the cash collections from operations and subtracting all the cash disbursements from
operations. This approach lists all the transactions that resulted in cash paid or received during the
reporting period.
Indirect Method:
The indirect method of calculating cash flow from operating activities requires you to start with net
income from the income statement (see step one above) and make adjustments to “undo” the impact of
the accruals made during the reporting period. Some of the most common and consistent adjustments
include depreciation and amortization.
It’s important to note: Both the direct and indirect methods will result in the same number, though the
process of calculating cash flow from operations differs.
While the direct method is easier to understand, it’s more time-consuming because it requires
accounting for every transaction that took place during the period. The indirect method is typically
faster and closely linked to the balance sheet, which is why most companies prefer it. Both methods are
accepted by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting
Standards (IFRS), so you can ultimately decide which method you prefer.
3. Calculate Cash Flow from Investing Activities:
After calculating cash flow from operating activities, you need to calculate cash flow from investing
activities. This section of the cash flow statement details cash flows related to the buying and selling of
long-lived assets like property, facilities, and equipment. Keep in mind that this section only includes
investing activities involving free cash, not debt.
4. Calculate Cash Flow from Financing Activities:
The third section of the cash flow statement covers cash inflows and outflows related to financing
activities. This includes cash flows from both debt and equity financing; in other words, cash flows
associated with raising cash and paying back debts to investors and creditors.
When using GAAP, this section also includes dividends paid, which may be included in the operating
section if using IFRS standards. Interest paid is included in the operating section under GAAP but
sometimes in the financing section under IFRS.
5. Determine the Ending Balance:
Statement of Financial Position
According to IFRS, a balance sheet is referred to as statement of financial position. This brings out more
clearly the role played by this statement. The balance sheet as traditionally known is a tool used to
represent the financial position of the business. Most books of accounting purport that the starting
stage or level of business bookkeeping process is when business transactions take place. Either one
undertakes a purchase or sale transaction. This is not true for when the organization is just
incorporated/or registered with the right authority, at that moment the business has a financial status
implied, even when no cash or non-cash resource has been pumped in to it as capital. For your
information, at this point, the business has a zero financial position.
According to IFRS the implication to the accounting information users is that, bookkeeping always starts
with asking ourselves about the financial position of the business. This aids the entrepreneur or the
learner to appreciate the fact that even when the plans of the business owner is to pump millions of
finances into the business, the financial position at that juncture is zero and not the large amounts in the
hands of the owner. In fact, this approach by IFRS further guide the entrepreneur/learner to appreciate
the concept of separate entity whereby the implication portrays that the cash in the hand of the
entrepreneur turns out to be different once transferred to the accounts of the business. That is, it
becomes capital for the newly formed organization.
Therefore, although conventionally the term balance sheet has been in use for several decades to
represent the financial position of a business within a specific period of time, the use of the term
“statement of financial position” in accountancy is good practice according to IFRS. Note that the
principle of preparing the financial statement has changed, but the new approach is more appealing to
the accounting users. Further, the entrepreneur need to note that as per IFRS, the names used for some
of the balance sheet components have been changed, as we shall discuss. The following lessons will
focus on in depth aspects of the statement of financial position of business which entail balance sheet
formats used in accounting and the implications statement of financial position components have on the
entrepreneur’s business.
Statement of Financial Position Format
In level one/beginner, it was stated that the balance sheet/statement of financial position is presented
in two main formats. Based on the criteria of the structure of arranging or recording the statement of
financial position components, the vertical and the horizontal versions are used as it was mentioned in
level one of this accounting tutorial series. In this lesson one we will demonstrate what this means. Of
course the entrepreneur or the learner need to note that the two approaches are not different. It is just
a matter of how the statement of financial position components are presented. The entrepreneur also
need to note that the terms used will be as per the IFRS set. Further, the statement of financial position
is classified in to gross and net asset format based on owners’ claim perspective as it will be
demonstrated.
a). Statement of Financial Position; Vertical Format
For level one/beginner and two/intermediate, the focus has been on the vertical format whereby the
structural aspect of this statement is the capital letter “T”. The two levels in this tutorials majored on the
vertical format for the sake of familiarization of how to prepare balance sheet. A detailed T format is as
shown herein
b). Statement of Financial Position; Horizontal Format
The horizontal format is not different from the vertical format as shown below
Notes
The following short notes comprehensively explain the detailed components of statement of financial
position whether vertical or horizontal approach is used. This is explained as follows;
Note 1: The non-current assets components of balance sheet depreciate with use through wear and tear
process as discussed in level two of this tutorial series. According to IFRS these assets are collectively
referred to as Properties Plants and Equipment (PPE) and their presentation in the statement of financial
position is governed by the IAS no 16.
Note 2: Trade debtors are also known as sundry debtors or total debtors. The fact is that, as an
organization grows, the number of debtors increase. The monetary value of debtors presented in the
statement of financial position is the aggregate one net of provisions associated with this balance sheet
item. According to IFRS, this balance sheet item is known as accounts receivables. The entrepreneur
need to note that since the number of trade debtors may increase, the recording of transactions
affiliated to this balance sheet component may be subjected to errors or the accounting clerks may
collude to with interested parties to corrupt the debtor system. As a result, preparation of total debtor
control accounts also referred to as sales ledger control account is prepared to counter check the
entries. This aspect will be discussed in level three of these accounting tutorials.
Note 3: This note focuses on cash in hand and cash at bank. In some accounting books, it is named as
cash and bank. This means the same. The cash and bank elements are the most liquid assets of the
business and their values appearing in the statement of financial position are the adjusted ones. What
do I mean by this? The entrepreneur/learner need to understand that due to transaction timing
mismatch, some of transactions affecting both cash and bank accounts may not be recorded yet at the
end of the financial year. That is, may be on transition state by the time books of accounts were being
closed. This calls for bank reconciliation. Therefore, the monetary values of bank and cash values
appearing in the balance sheet are the reconciled ones as per bank reconciliation statement.
Note 4: The prepaid expenses appearing in the statement of financial position of a business at the end of
the period are not expenses as it apparently sounds. It is a current asset due to the fact that the
business had paid this element of expense in advance and this means that if the business did not pay in
that manner which resulted in to an actual cash out flow, then such cash will be in the business at this
time. Therefore, this item is as good as current asset. Another thing to be noted is that as the new
financial period rolls out, a prepayment account is used to record the opening balance value of this item.
This can take the form of a prepayment account or the corresponding expense account will portray a
debit balance brought forward (bal b/f) for this is another financial period. This aspect will be discussed
further in this level three.
Note 5: The accrued income appearing in the statement of financial position of a business at the end of
the period are not income per se’ as it apparently appears. It is a current asset due to the fact that the
business had provided the service(s) but actual cash inflow is not yet received by the end of the financial
period. Therefore, this item is as good as current asset. Another thing to be noted is that as the new
financial period rolls out, an account is used to record the opening balance value of this item. This can
take the form of accrued income account or the corresponding income account with a debit balance
brought forward (bal b/f) for this is another financial period. This aspect will be discussed further in this
level.
Note 6: Unused stationery item is unique in that its acquisition is categorized as an operating expense.
This classification applies if all units of stationery are used up at the end of the financial period, hence
the monetary amount thereof is charged in the profit and loss account. If it is partly used up, then the
accounting treatment is twofold.
That is, the part of stationery cost which is used up at the yearend is charged to P&L account and the
balance is treated as a current asset or as inventory of unused stationery.
The journal entries will be as follows;
i) On acquisition/purchase of stationery
DR Stationery A/C XXX
CR Cash/or Bank A/C XXX
ii) On full usage of the stationery items
DR P&L A/C XXX
CR Stationery A/C XXX
iii) On partial usage of the stationery items
DR P&L A/C with the portion used up XX
CR Stationery A/C XX
NB: The unused portion of stationery will be categorized as a current asset item
Note 7: inventory as used in level one and two is for finished goods. Also referred to as merchandized
goods which are completely produced. The entrepreneur/learner should understand that in addition to
inventory of finished goods, there are also other cases of raw materials which are unused at the end of
the financial period especially with cases of manufacturing organizations. Such materials are termed as
closing inventory of raw materials. On the same breathe, some raw materials are utilized in production
but by the time the year has come to an end, the goods are incomplete. Such materials which are in the
state of being processed are referred to as closing inventory of Work in Progress (WIP). The
entrepreneur/learner need to note that any closing inventory is classified as current asset whether it is
of finished goods, work in progress or of raw materials. In level three, the focus will be inventory of all
categories.
Note 8: Capital is owner’s equity or claim. It is the personal contribution that the owner of the business
makes towards start of the business.
Note 9: Net profit is generally referred to as firm reserve. If it is ploughed back in to the business, it is
referred to as retained earnings or if it is distributed to the shareholders, it is referred to as dividends. It
should be noted that if it is ploughed back to the organization, it becomes part of the capital hence it is
owner’s equity or claim. More light will be shade on it shortly.
Note 10: Loan is a long term external debt which is repayable with interest within a period of more than
one year. The principal part of the loan forms part of long-term liability of the organization while the
loan interest part is an operating expense, hence charged in the P&L A/C at the end of the year.
Note 11: Accrued Expense appearing in the statement of financial position of a business at the end of
the period are not expenses as it apparently appears. It is a current liability due to the fact that the
business had received or enjoyed the service(s) in advance and this means that if the business did not
pay it results to an actual cash out flow in the future hence an obligation. Therefore, this item is as good
as current liability. Another thing to be noted is that as the new financial period rolls out, an accrued
expense account is used to record the opening balance value of this item. This can take the form of
accrued expense account or the corresponding expense account with a credit balance brought forward
(bal b/f) for this is another financial period. This aspect will be discussed further in this level.
Note 12: Income in advance appearing in the statement of financial position of a business at the end of
the period are not an income as it apparently appears. It is a current liability due to the fact that the
business had received the cash before providing the service(s). Hence an obligation. Therefore, this item
is as good as current liability. Another thing to be noted is that as the new financial period rolls out, an
income in advance account is used to record the opening balance value of this item. This can take the
form of income in advance account or the corresponding income account with a credit balance brought
forward (bal b/f) for this is another financial period. This aspect will be discussed further in this level.
Introduction to source documents
In level one of this accounting tutorials, transactions were directly posted to the respective ledger
accounts for the sake of understanding the concept of double entry. However in real accounting
practice, the accountant has to consider some initial steps of the transactions in question. The first step
is to record business transaction in a source document. In this section, we will define this document and
further interrogate the various types used by business men/women. For some documents, the author
has highlighted the details in those documents. However, the full details for every document are shown
at the stage of discussing the link between source document and books of original entry.
What is a source document in accounting?

A source document is a note where a transaction is recorded when it immediately takes place. The
moment two or more parties engage in a transaction that can be assigned a monetary value, this
transaction need to be written down on a document to imply a transaction has taken place. Also, the
source document will be used for future evidence that a transaction took place on a particular time and
is authentic. Therefore the document captures the key details of the transaction such as date, names of
the parties involved, amount paid or to be paid in the future and the transaction substance. A unique
number is used for future reference. At this point, the learner need to note that the GAAP principle of
Verifiable Objective Evidence is paramount. It states that accounting data must be verified. In other
words, documentary evidence of transactions must be made which are capable of verification by an
independent party. Failure to verify such accounting data implies that it is not reliable and or not
dependable, i.e., is biased data. Verifiability and objectivity express dependability, reliability and
trustworthiness that are very useful for the purpose of displaying the accounting data and information
to the users.
Uses of Source documents
Source documents have several uses which include and not limited to;
Evidence for future reference that a transaction took place
Audit trailing; source document is used during audit process hence make audit easy and time saving
Improve transparency and accountability. When an employee especially knows there is strict adherence
to book keeping practices such as recording of transactions in a source document, this makes him or her
be straight forward in ensuring the right thing is done.
Correction of errors. Information recorded in the source document can be of help when errors has
occurred especially during posting of transactions to the ledger accounts.
Source of information to be transferred to the books of original entry before posting the same to the
right ledger accounts.
Types of source documents
There are many types of source documents that a business uses from the time of enquiring of the
available goods or services from the potential sellers up to the point of ordering the goods from the
identified seller and thereafter. Apart from such documents, related to purchase of goods or services,
there are other source documents related to day to day operations of the business which will also be
explained in this section. Further, the specific types of source documents depends on the nature of
business under evaluation. For the source documents affiliated to buying and selling of goods or
services, in this section, we will consider each one of them following systematic steps starting with the
documents that are used in the initial stages of transaction process (ordering of the goods by the buyer)
up to when the goods are paid for. So we will consider each step and the relevant documents used. The
day to day operational activity related source documents, will thereafter be discussed. This documents
are described as follows as per each step;
Step one: Ordering of goods by the potential buyer
The appropriate document used is purchase order;
Purchases Order
It is a document prepared by the buyer of goods which is sent to the seller/supplier to order goods as
per the specifications of the former. This document is prepared after the potential buyer has considered
several suppliers and has now settled on a particular one. Therefore, the document contains the details
of the nature of goods the buyer wants. It is the document that initiates the other transactions between
the buyer and the seller. If the ordering is locally made (buyer and seller) are within the country, the
document is referred to as Local Purchase Order (LPO). If the goods are ordered from other countries,
the document is referred to as Overseas Purchase Order (OPO).
Step two: Physical delivery of the goods by the supplier
Once the seller receives the request to supply the goods to the buyer, he packages the goods per the
purchase order and sends them to the respective buyer. In accompaniment, the seller prepares a
delivery note
Delivery note
It is a document prepared by the seller who then sent it to the buyer of goods as an evidence that goods
have been dispatched in good order. When the document is simultaneously received together with the
goods, the buyer counter checks whether the details in the delivery note is the same as per the goods
supplied and also as per the purchase order details. Once the buyer confirms that the goods are in good
condition, he or she confirms the same by preparing a goods received note.
Goods Received Note
Goods received note is the document prepared by the buyer of goods to affirm that the goods were
received as indicated in the delivery note and they are in good order. So this document is a response to
the seller’s delivery note. It acts as an acknowledgement note that the goods were received and no
cases of discrepancies.
Step three: Demand for Payment by the Seller
If there are no discrepancies, the next step is to pay for the goods. Hence the seller writes to the buyer
an invoice demanding for payment.
Invoice:
An invoice is a document prepared by the seller to the buyer to claim payment for goods that had been
sold on credit. An invoice is classified in to two categories depending on who is buying and selling the
goods for the business of our focus can either be a seller or a buyer of goods or services. Ie, it is
directional for it can originate from the business of our focus or from a supplier who sold goods or
services to the business. The two categories are; sales and purchases invoice;
Sales invoice:-This refers to a note written by seller to the buyer claiming for payment for goods sold on
credit. It is also referred to as outgoing invoice for it is sent by the seller to the buyer. As the seller
prepares this document, he serializes for recording purpose. The note contains the following details;
-Name and postal address of the supplier (seller) and customer (buyer)
-Date when the seller sold the goods
-Narration of nature of goods sold in terms of type, quantity etc
-Price per unit and the total amount
-Amount of sales tax charged such as Value Added Tax (VAT)
-Terms of sale, for example types of discount provision
Purchases invoice:- This refers to a note received by the buyer from the seller claiming to be paid for
goods supplied on credit. It is also referred to as incoming invoice for it is received by the buyer form the
seller. So the business receiving the note does not need to re-number it. The note contains the following
details;
-Name and postal address of the supplier (seller) and customer (buyer)
-Date when the seller sold the goods
-Narration of nature of goods sold in terms of type, quantity etc
-Price per unit and the total amount it translates to
-Amount of sales tax charged such as Value Added Tax (VAT)
-Terms of sale, for example types of discount provision
The learner need to notice that a sales invoice and purchases invoice is one and the same document.
The difference is directional, that is we name or identify the document based on the point where it
originating from.
NB: That goods sold/bought may have some discrepancies such as wrong calculation of invoice value
(either over or under charge), physically damaged goods or other reasons. Whichever way, the business
affected prepares a damaged goods note and sends it to the seller or the buyer to adjust the error.
Step four: Goods Undervalued
Credit note:
As a learner in this tutorial series you need to understand that sometimes when goods are sold, they
may be having some discrepancies such as wrong addition of the total amount to be claimed, or
packaging of excess goods than it was in the purchase request or goods packaged and delivered by the
seller may be of a higher/lower quality or standard than what the buyer had ordered. In such
circumstance, the seller will prepare a credit note to correct that anomaly.
Credit note is a document prepared by the seller to the buyer to show the additional amount of money
to be added on top of what was indicated in the sales invoice. This happens when the sales invoice (ie
outgoing invoice) was erroneously under stated. Therefore, a credit note is also known as additional
sales invoice for the aim of its preparation is to forward it to the buyer to correct a mistake of
undercharge.
Step five: Goods Returned by the buyer
Debit note
A debit note is a document prepared by the seller to the buyer to correct an overcharge case in the sales
invoice. This happens when the sales invoice was erroneously overstated. Therefore, a debit note is used
to correct a case of overcharge. As a learner you need to understand that a debit note is the opposite of
a credit note and the aim of preparing it is to highlight the damaged goods and the monetary value
thereof so that both parties can adjust the sales invoice downwards. A debit note can be classified as
incoming or outgoing debit note based on where the document originates from. If the note is written by
the seller the business we are focusing on, then it is referred to as the incoming debit note. Whereas, if
it emanates from the business to the buyer, it is referred to as an outgoing debit note.
Step Six: Actual Payment of goods
Once the buyer is satisfied with goods supplied, he makes the payment either through the banks or
cash. In exchange the seller of the goods will issue a receipt
Cash Receipts
This is a document issued by one party (ie the seller) after actual receipt of cash or check from another
party (the buyer) for goods or services sold on credit or in cash (spot). This document contains the
following details;
Name of customer
Date when cash or check was received
the amount of cash/check received (In words and figures)
Signature of the Receiver
Step seven: Other Source documents for general purposes

NB: The following section interrogates the source documents related to administrative issues or day to
day business operations, this documents are;
Cash Payment Vouchers
It is a note or document used to provide an evidence that a payment has been made for goods or
services supplied to the business in question. It is an authentic certificate for payment and it is usually
checked and authorized by an accountable or an officer in authority before cash can be paid. Each
business can prepare a unique document to be used when payment has been made by a third party. An
example of a payment voucher is salary pay slip. It should be noted that the amount to be paid using this
document has a threshold or a minimum level which depends on an individual organization. But
generally, the amount to be paid in this case should be substantial or material and also the intervals
between one payment and the other is reasonably long otherwise a petty payment voucher will be used.
Petty Cash Voucher
A petty payment voucher plays the same role as that of payment voucher only that the amount paid is in
small or immaterial form and again the payment is done frequently like on daily basis. For instance,
every day, there may be small payments for items such as tea leaves, credit cards, sugar, salt and
postage.
Bank Pay in Slip
What are the Main Types of Assets?
An asset is a resource owned or controlled by an individual, corporation, or government with the

expectation that it will generate a positive economic benefit. Common types of assets include current,
non-current, physical, intangible, operating, and non-operating. Correctly identifying and classifying the
types of assets is critical to the survival of a company, specifically its solvency and associated risks.
The International Financial Reporting Standards (IFRS) framework defines an asset as follows: “An asset
is a resource controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise.”
Types of Assets
Examples of assets include:
Cash and cash equivalents
Accounts Receivable
Inventory
Investments
PPE (Property, Plant, and Equipment)

Vehicles
Furniture
Patents (intangible asset)
Properties of an Asset
There are three key properties of an asset:
Ownership: Assets represent ownership that can be eventually turned into cash and cash equivalents
Economic Value: Assets have economic value and can be exchanged or sold
Resource: Assets are resources that can be used to generate future economic benefits
Classification of Assets
Assets are generally classified in three ways:
Convertibility: Classifying assets based on how easy it is to convert them into cash.
Physical Existence: Classifying assets based on their physical existence (in other words, tangible vs.
intangible assets).
Usage: Classifying assets based on their business operation usage/purpose.
Types of Assets
Classification of Assets: Convertibility
If assets are classified based on their convertibility into cash, assets are classified as either current assets
or fixed assets. An alternative expression of this concept is short-term vs. long-term assets.
1. Current Assets
Current assets are assets that can be easily converted into cash and cash equivalents (typically within a
year). Current assets are also termed liquid assets and examples of such are:
Cash
Cash equivalents
Short-term deposits
Accounts receivables
Inventory
Marketable securities
Office supplies
2. Fixed or Non-Current Assets
Non-current assets are assets that cannot be easily and readily converted into cash and cash
equivalents. Non-current assets are also termed fixed assets, long-term assets, or hard assets. Examples
of non-current or fixed assets include:
Land
Building
Machinery
Equipment
Patents
Trademarks
Classification of Assets: Physical Existence
If assets are classified based on their physical existence, assets are classified as either tangible assets or
intangible assets.
1. Tangible Assets
Tangible assets are assets with physical existence (we can touch, feel, and see them). Examples of
tangible assets include:
Land
Building
Machinery
Equipment
Cash
Office supplies
Inventory
2. Intangible Assets
Intangible assets are assets that lack physical existence. Examples of intangible assets include:
Goodwill
Patents
Brand
Copyrights
Trademarks
Trade secrets
Licenses and permits
Corporate intellectual property
Classification of Assets: Usage
If assets are classified based on their usage or purpose, assets are classified as either operating assets or
non-operating assets
1. Operating Assets
Operating assets are assets that are required in the daily operation of a business. In other words,
operating assets are used to generate revenue from a company’s core business activities. Examples of
operating assets include:
Cash
Accounts receivable
Inventory
Building
Machinery
Equipment
Patents
Copyrights
Goodwill
2. Non-Operating Assets
Non-operating assets are assets that are not required for daily business operations but can still generate
revenue. Examples of non-operating assets include:
Short-term investments
Vacant land
Interest income from a fixed deposit
Importance of Asset Classification:
Definition
An income and expenditure account is an account revealing the surplus or deficit of a non-trading
concern, which involves matching incomes and expenses over a specified accounting period.
Explanation
An income end expenditure account is simply another name for the expense and revenue summary of a
non-trading concern. This is prepared on the lines of expense and revenue summary.
All incomes received from receivables and all expenses paid or payable are accounted for at the end of
the period it covers.
An income and expenditure account only includes revenue expenses and income. It does not include
capital expenditure and income, and it excludes all items in respect of the previous or subsequent
period.
The income and expenditure account is the final account for a non-profit organization. The final account
of a business enterprise is called a trading and profit and loss account, while in the case of a non-trading
enterprise, it is known as an income and expenditure account.
Given that non-trading organizations cannot prepare profit and loss accounts (i.e., as they do not
operate to earn profits), the final account shows either a surplus or deficit.
Features of Income and Expenditure Account
The following are the main features of a non-trading organization’s income and expenditure account:
Expenses are entered on the debit side and incomes on the credit side
Any income of revenue relating to the present period (whether actually received or not) and any
expenditure of revenue nature (whether paid or not) is included
Capital items are excluded
All receipts and payments relating to the preceding or following period are excluded
The excess of income over expenditure (or vice versa) is shown.

What are Contra Accounts?
A contra account offsets the balance in another, related account with which it is paired. Contra accounts
appear in the financial statements directly below their paired accounts. Sometimes the balances in the
two accounts are merged for presentation purposes, so that only a net amount is presented. If the
related account is an asset account, then a contra asset account is used to offset it with a credit balance.
If the related account is a liability account, then a contra liability account is used to offset it with a debit
balance. Thus, the natural balance of a contra account is always the opposite of the account with which
it is paired.
Top Accounting Interview Questions and Answers –
Q1. Tell me about yourself!
Ans. The employer’s intention is none other than to break the ice and get to know you a little better to
steer the conversation in the direction you want. Without a doubt, this is why it is so important. In your
answer, you must give examples of circumstances and moments in your life that led you to the
accounting field. Were you the treasurer of your soccer team when you were a child? Have you saved
for months to buy a car? Anything goes to make a positive first impression.
Q2. What are the different types of accounting?
Ans. Different types of accounting are –
Financial Accounting – This branch of accounting records, summarises and reports the business
transactions that take place over a time period in an organisation. It is required in both the private and
public sectors.
Administrative Accounting – Administrative accounting is focused on the administrative aspects of the

company and is used above all to assess the fulfilment of the established objectives and improve the
implemented strategy. It is very useful for making forecasts and planning the actions and resources to
be used.
Tax Accounting -Tax accounting helps to register and prepare reports related to tax returns to the public
treasury and payment of taxes.
Cost Accounting – This type of accounting is more focused on companies of an industrial nature. It helps
to make a detailed analysis of the unit costs of production, sales, and, in general, the production process
that the company carries out.
Management Accounting – Management accounting has a broader vision than cost accounting since it
records all the economic and financial information of the company to be able to make short-term and
long-term decisions.
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.
Show you have a good understanding of the accounting platform you use. You can further specify what
type of businesses use them. Generally, small and growing enterprises use the affordable plan of
QuickBooks Online for creating invoices, tracking expenses and utilising the software’s built-in reports.
Q4. What is working capital?
Ans. Working capital is calculated as current assets minus current liabilities, which is used in day-to-day
trading.
In a simple accounting scheme, the concept of working capital focuses on the capital resources that a
given company can count on in the short term to operate. These resources owned by the company are
the cash, the portfolio of financial products, and other investments made by the company.
Q5. Give a suggestion to improve the company’s working capital flow.
Ans. In my opinion, the stock on hand can be the key to improving the working capital of the company.
Of all the components of working capital, the stock is something we can control. We can pressure our
debtors to pay us instantly, but we cannot have direct control over them because they are separate legal
entities and, in the end, they are the ones who give us business.
We may tend to delay payments from our suppliers, but it ruins business relationships and hinders
goodwill in the industry. Also, if we delay payments, they may not supply goods in the future.
Maintaining liquidity in the form of funds in the bank can help the flow of working capital, but it comes
at an opportunity cost.
With all of this in mind, I personally believe that inventory management can be of great help in
improving the working capital of the company. Over-stock should be avoided and stock turnover rates
should be high.
This answer is generic. There are industries that work with negative working capital, such as electronic
commerce, telecommunications, etc. So do some research on working capital before answering.
Q6. How do you maintain accounting accuracy?
Ans. Maintaining the accuracy of an organization’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 them quickly if any errors do arise. My favourite is MS Excel.
Some of the most common ways of maintaining accuracy in accounting are:
Identify revenue streams
Keep a close eye on invoices and receipts

Prepare tax returns to avoid penalty
Prepare financial statements
Keep tabs on deductible expenses
Q7. Since you mentioned that MS Excel is your favourite, please give us three cases where Excel will
make your life easier.
Mention these three advantages for this common accounting interview question.
Excel saves a lot of time. Automating repetitive and predictable tasks with macros is one example. This
allows one to format, filter and analyse vast sets of data within seconds.
Excel is highly customisable. Accountants need to create reports with tables and charts in excel. The
same can be re-used for creating other reports without having to use or create new templates.
Excel is convenient in comparing financial datasets. It helps one in tracking financial records and see
from which source the cash flow is generating.
Also Explore >> Payroll Management Courses
Q8. 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.
Q9. What is the difference between ‘accounts payable (AP)’ and ‘accounts receivable (AR)’?
Ans. For this simple accounting interview question refer to the table below.
Accounts Payable Accounts Receivable
The amount a company owes because it purchased goods or services on credit from a vendor or
supplier. The amount a company has the right to collect because it sold goods or services on credit to a
customer.
Accounts payable are liabilities. Accounts receivable are assets.
Q10. What is the difference between a trial balance and a balance sheet?
Ans. This is a basic accounting interview question. For the answer, mention that 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 that shows the assets, liabilities, and equity
of a company and is used to ascertain its financial position on a particular date.
Q11. 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 a lack of revenue
going forward in the pipeline.
Q12. What are the common mistakes in accounting?
Ans. This is one of the most frequently asked accounting interview questions.
The most common mistakes in accounting are –
Mixing personal accounts with that of the company
Little communication between the company and the accountant
Not keeping a backup
Misallocated resources
Not saving the receipts
Performing manual accounting
Not keeping the accounting books up to date
Q13. What is the difference between inactive and dormant accounts?
Ans. Inactive accounts are which are closed and will not be used in the future. Dormant accounts are not
currently functional but may be used in the future.
Q14. Are you familiar with the Accounting Standards? How many accounting standards are there in
India? [Frequently asked accounting interview question]
Ans. Even if you’ve never worked as an accountant before, it is essential that you show knowledge of
International Accounting Standards. Although it is true that this is such an extensive subject that it is
impossible to know it by heart, before the interview you should have studied the most recent changes
to be prepared to talk about them.
There are currently 41 Accounting Standards that are usually issued by the International Accounting
Standards Board (IASB).
Q15. 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.
Every organisation’s financial documents are created as per Accounting Standards. The uniformity allows
one to compare its market position against others who follow the same mandatory principles. As a
common methodology exists, there remains no room for misrepresentation.
Q16. If our organization 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 – the percentage of outstanding accounts,
aging analysis, and percentage of credit sales.
Q18. What is 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. Name some 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 do 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. What is a 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
Q24. What is tally accounting?

Ans. It is accounting software used by small businesses and shops to manage routine accounting
transactions. It is a popular accounting software created by Tally Solutions. It is used for all kinds of
accounting-related activities including recording of financial transactions, generating statements of
liabilities and assets, and other analytical purposes.
Q25. What are fictitious assets?
Ans. Fictitious assets are intangible assets and their benefit is derived over a longer period, for example,
goodwill, rights, deferred revenue expenditure, miscellaneous expenses, preliminary expenses, and
accumulated loss, among others.
To excel in the accounting interview round, you may also consider taking up courses in the following
subjects:
• IFRS Courses
•GAAP
•ACCA
Q26. 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.
Q27. What is CMM?
Ans. Capability Maturity Model (CMM) is a document that provides a model and six elements of
infrastructure used for measuring the effectiveness and capability of an organization’s finance process.
Q28. What is the meaning of purchase return in accounting?
Ans. As the name suggests, a purchase return is a transaction where the buyer of merchandise,
inventory or fixed assets returns these defective or unsatisfactory products back to the seller.
Q29. What is retail banking?
Ans. Retail banking or consumer banking involves a retail client, where individual customers use local
branches of larger commercial banks.
Q30. What is offset accounting?
Ans. Offset accounting is the process of cancelling an accounting entry with an equal but opposite entry.
It decreases the net amount of another account to create a net balance.
Q31. What are the trade bills?

Ans. These are the bills generated against each transaction. It is a part of the documentation procedure
for all types of transactions.
Q32. 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 the balance sheet on which that asset can be sold. Do elaborate on the answer to this accounting
interview question.
Q33. 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.
Q34. How important is documentation when it comes to accounting?
Ans. I believe that the accounting team of any company has a responsibility to present a true and fair
view to the shareholders and management of the company. The accounting team is like the watchdog of
the organization.
That is why documentation becomes very important in accounting. Appropriate documentation must be
verified so that an adequate audit trail is maintained and justified when necessary.
Q35. What is an 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.
Q36. What do you mean by the company’s payable cycle?
Ans. It is the time required by the company to pay all its account payables.
Q37. What is Scrap Value in accounting?
Ans. Scrap Value is the residual value of an asset that any asset holds after its estimated lifetime.
Q38. Which account is responsible for interest payable?
Ans. The current liability account is responsible for interest payable.
Prepare for Top Financial Analyst Interview Questions
Q39. What is the departmental accounting system?
Ans. 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 the profitability and efficiency of
every department.
Q40. What is a perpetual inventory system?
Ans. 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.
Q41. What do you mean when you say that you have negative working capital?
Ans. When a company’s current liabilities exceed its current assets, it is named negative working capital.
It is a common terminology in certain industries like retail and restaurant businesses.
Q42. What are the major constraints that can hamper relevant and reliable financial statements?
Ans. Here are some of the major constraints:
Delay, which leads to irrelevant information
No balance between costs and benefits
No balance between the qualitative characteristics
No clarity in true and fair view presentation
Support this accounting interview question with relevant examples.
Explore More – What is Corporate Finance?
Q43. Tell me the golden rules of accounting, just mention the statements.
Ans. This accounting interview question tests your professional view of the subject. You can mention by
elaborating this accounting interview answer on the 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
Q44. Please elaborate on what this statement means – “Debit the Receiver, Credit the Giver”.
Ans. 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.
Q45. Any idea what is ICAI?

Ans. Of course, it is the abbreviation of the Institute of Chartered Accountants in India.
Q46. Give some examples of fixed assets that you record in the balance sheet?
Ans. To answer this accounting interview question, you need to specify your understanding of the
concept. Before jumping straight to the answer, you may want to define fixed assets first. A brief intro
such as – fixed assets are those which are not consumed in one fiscal year, will ensure the recruiter that
you mean these are long-term assets. You can further mention that these assets are recorded in the
asset section of the balance sheet.
Some typical examples of fixed assets are automobiles, furniture, office, or any equipment an
organisation requires.
Q47. What is Executive Accounting?
Ans. Executive Accounting is specifically designed for service-based businesses. This term is popular in
finance, advertising, and public relations businesses.
Q48. What are the bills receivable?
Ans. 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 talk about generic stuff.
Q49. Define Balancing.
Ans. Balancing means equating or balancing both the debit and credit sides of a T-account.
Time For Accounting Interview Question Quiz
accounting-interview-quiz
The right answer is the balance sheet.
The right answer is the 2nd option – the income statement will be impacted.
The right answer is -Cash flow statement.
The right answer is the Quick Ratio.
Q50. What is Marginal Cost?
Ans. If there is an 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
Q51. What are Trade Bills?

Ans. Every transaction is documented and the trade bills are those documents, generated against each
transaction.
Q52. Can you define the term Material Facts?
Ans. Yes, these are the documents such as vouchers, bills, debit and credit notes, receipts, etc. They
serve as the base of every account book.
Q53. What are the different stages of the Double Entry System?
Ans. There are three different stages of the 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
Q54. What are the disadvantages of a Double Entry System?
Ans.
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
Q55. What are Assets Minus Liabilities?
Ans. Assets Minus Liabilities stand for an owner’s or a stockholder’s equity.
Q56. What is GAAP?
Ans. 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
Q57. Can you tell me some examples of liability accounts?
Ans. 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
Q58. What is the difference between accounts receivable and deferred revenue?
Ans. 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.
Q59. Where should you record a cash discount in a journal entry?
Ans. A cash discount should be recorded as a reduction of expenses in a cash account.
Q60. What is a compound journal entry?
Ans. A compound journal entry is just like other accounting entries; the only difference is that it affects
more than two account heads. The compound journal entry has one debit, more than one credit, or
more than one of both debits and credits.
Q61. What is the dual aspect term?
Ans. The dual aspect suggests that every business transaction requires double-entry bookkeeping. This
can be understood with the example- If you purchase anything, you give the cash and receive the stuff,
and when you sell anything, you lose the stuff and earn the money. This defines the aspects of every
transaction.
Q62. Define depreciation.

Ans. This is one of the most basic accounting questions for an interview. You can just mention that
depreciation refers to the decreasing value of any asset that is in use. It is necessary for calculating a
business’s net income in every accounting period.
Do provide examples to elaborate on this accounting interview answer.
Q63. What are the different types of depreciation?
Ans. This is a follow-up to the previous accounting interview question. Mention the following, common
depreciation methods.
Straight Line Depreciation
Double Declining Balance
Units of Production
Discounted Cash Flow
All these methods have similar inputs as variables.
Useful Life – This refers to a period when the asset remains an economical option for a business. Beyond
this time, the asset is not useful.
Salvage Value – This refers to the asset’s value after the useful value. A business can sell it for a reduced
price.
Total Cost of Asset – It is the inclusive cost of taxes, shipping and others.
To support this accounting interview answer, you can highlight how they are calculated.
The formula for Straight Line Depreciation over a year is
Total Cost of Asset – Salvage Value (estimated) / Useful life of an Asset = Depreciation Expense (Annual)
The formula for calculating Double Declining Balance is
(Total Cost of Asset – Salvage Value (estimated) / Useful life of an Asset) x 2 = Depreciation Expense
(Annual)
Q64. What is the difference between the consignor and consignee?
Ans. This is a very simple accounting interview question. Just mention the following.
Consigner – S/he is the shipper of the goods
Consignee – S/he is the recipient of the goods.
Q65. Define Partitioning.

Ans. Partitioning refers to the division/subdivision/grouping/regrouping of financial transactions in a
given financial year.
Q66. Differentiate between Provision and Reserve.
Ans. For this accounting interview question, try to keep your answer brief but to the point.
Provisions – This refers to keeping the money for a given liability. In short, EXPENSES.
Reserves – Refers to retaining some amount from the profit for future use. In short, PROFITS.
Q67. What is an over-accrual?
Ans. It is a situation where the estimate for accrual journal entry is very high, and this may apply to the
accrual of revenue or expense.
Q68. What is reversing journal entries?
Ans. Reversing entries refer to the journal entries that are made when an accounting period starts.
These entries reverse or cancel the adjusting journal entries that were made at the end of the previous
accounting period.
Q69. Name some intangible assets.
Ans. Intangible assets include –
Accounting for you learning, [31-May-22 3:02 AM]
Patents
Copyrights
Trademarks
Brand names
Domain names
Q70. What is a Bad debt expense?
Ans. Bad debt expense is asset accounts receivable of a company and is considered to be uncollectible
accounts expense or doubtful accounts expense.
Q71. When do you capitalize rather than expense a purchase?
Ans. An item’s cost is capitalized if it is expected to be consumed by the company over a long period.
This way their economic value does not depreciate.
Q72. When does goodwill increase?

Ans. Goodwill can be increased through the acquisition of another company as a subsidiary, by paying
more than the fair value of its tangible and intangible assets.
Q73. What are Revenue Recognition and Matching Principles?
Ans. Revenue Recognition Principle – This principle suggests that the revenue should be recognized and
recorded when it is realized and earned, no matter when the amount has been paid.
Matching Principle – This principle dictates the company to report an expense on its income statement
at the time the related revenues are earned. It is associated with the accrual basis of accounting.
Q74. Name different accounting concepts.
Ans. The most popular accounting concepts are –
Accounting Period Concept
Business Entity Concept
Cost Concept
Dual Aspect Concept
Going Concern Concept
Matching Concept
Money Measurement Concept
Q75. What is the owner’s equity?
Ans. The owner’s equity is a business owner’s claim against the assets of the business. It is also called
the capital of the business and is calculated by subtracting the equity of creditors from the total equity.
Q76. What is a debit note?
Ans. A debit note or debit memorandum is a commercial document sent to a seller, by a buyer, formally
requesting a credit note. The original document is sent to the party to whom the goods are being
returned and the duplicate copy is kept for office record.
Q77. What is a credit note?
Ans. A credit note is a receipt given to a buyer who has returned a product, by the seller/shop. This
intimation suggests that the buyer’s account is being credited for the purpose indicated.
Q78. Explain Contingent Liabilities.
Ans. Contingent Liabilities are potential obligations that may or may not become an actual liability. They
may or may not be incurred by an entity, based on the outcome of an uncertain future event, e.g. – If an
ex-employee of an ABC company sues it for gender discrimination for any particular sum, the company
has a contingent liability. In case the company is found guilty, it will have a liability, and if it is not found
guilty, the company will not have an actual liability.
Q79. What is GST?
Ans. GST or Goods and Service Tax is an indirect tax charged on the value of the service or product sold
to a customer. Here the consumers pay the tax to the seller, who thereby deposits the GST to the
government.
Q80. Can you name some common errors in accounting?
Ans. Some common accounting errors are –
Error of omission
Error of commission
Error of original entry
Error of accounting principle
Compensating error
Error of entry reversal
Error of duplication
Read More – Top SAS Interview Questions and Answers
Q81. What is project implementation?
Ans. Project implementation is a phase when the plans and visions come into reality. This includes
carrying out the tasks to deliver the outputs and monitor the related progress.
Q82. What are the various stages of project implementation?
Ans. There are six steps involved in project implementation, which are –
Identifying need
Generating and screening ideas
Conducting a feasibility study
Developing the project
Implementing the project

Controlling the project
Q83. Are you in favor of having accounting standards?
Ans. I believe that accounting standards contribute to high quality and accurate reporting and ensure
reliable financial statements.
Q84. What do you mean by Amortization and also mention its journal entry?
Ans. Amortization is an accounting concept that is used to gradually write off the cost. Through
amortization, over a period of time, one can allocate the cost of any intangible asset. Also, it can be
done to repay any loan principal. However, those assets which have an indefinite life like Goodwill can
not be amortized.
Below is the journal entry for amortization:
Debit Credit
Amortization expense x~xx
Accumulated amortization xxx
The concept of amortization in accounting is different from depreciation. The major point of difference
between amortization and depreciation is their usage. Amortization works for intangible assets whereas
depreciation works for tangible assets. Also, unlike depreciation, amortization has no salvage value.
Another key difference between both is that depreciation can be implemented using both the straight-
line method and accelerated method but amortization is implemented through the straight-line method.
Using the below transactions solve the practical accounting questions:
Firm’s Name – ABC Ltd. which is 10 years old firm on December 31, 2018. As of January 01, 2019, below
are the trial balance entries
Transactions/entries Amount in INR
Accounts Payable 50,000
Accounts Receivable 20,000
Cash 4,50,000
Merchandise inventory 6,620
Land 60,000
Unearned revenue 10,000

Salaries payable 32,000
Common Stocks 15,000
Prepaid Rent for Office 15,000
Supplies 20,000
Retained Earnings 25,000
Later other transactions that took place in 2019 are:
Paid salaries payable from 2018.
As of March 2019, the petty cash expense made was Rs 10,000.
Advanced payment made for the company’s car which was on lease Rs, 1,00,000 on May 1, 2019.
Paid office rent in advance Rs. 25,000 on May 3, 2019.
Supplies purchased for Rs. 10,000 on the account.
During the year, purchased 20 CCTV cameras for Rs. 20,000 for cash.
Sold 103 CCTV cameras for Rs. 42,000 (calculate the cost of goods sold using FIFO method)
Accounts payable was Rs. 30,000
Petty cash replenished and the receipts included office supply expenses – Rs. 2,000, miscellaneous Rs.
7,000. Currency left Rs.1000
Billed Fixing services for Rs 10,000 for the year.
The salaries paid were Rs. 30,000 in cash
Accounts receivable were Rs. 60,000
Ad and marketing expense Rs. 6,000
Utility expense paid Rs. 5,000
The dividend paid to the shareholders was Rs. 15,000.
Q85. What is the total value of cash in the above transactions?
Ans. Here is the total calculation of cash:
All Cash Transactions and balances:

Actual Cash = 4,50,000
Salaries payable = 32,000
Company’s car lease = 1,00,000
Office rent = 25,000
CCTV purchase = 20,000
Accounts payable = 30,000
Petty cash = 10,000
Petty cash replenished = 7,000 + 2000
Balance petty cash = 1000
Salaries paid = 30,000
Accounts receivable = 60,000
Ad and marketing expense = 6,000
Utility expense = 5,000
Dividend paid = 15,000
Hence as per the nature, here is the actual calculation of cash:
4,50,000 – 32,000 – 1,00,000 – 25,000 – 20,000 – 30,000 – (10,000 – 1,000) – 1,000 + 60,000 – 5,000 –
15,000 = 2,73,000
Q86. What is the total value of accounts receivable in the above transactions?
Ans. All entries related to accounts receivable:
Income from selling CCTV camera = 42,000
Billed Fixing services = 10,000
Hence, here is the total calculation of accounts receivable:
20,000 + 42,000 + 10,000 + 60,000 = 1,32,000

Q87. What is the value of the total fixed assets?
Ans. As no other assets apart from land are mentioned we will consider Land as the only fixed asset:
Value of Fixed Asset:
Land = 60,000
Q88. What will all be included in current assets?
Ans. We will include the following things:
Closing inventory
Bank and cash value
Supplies
Account Receivables
Q89. What will be included in the Owner’s equity?
Ans. We will include the following things in owners equity:
Capital (Common Stocks)
Retained earnings (balance at the beginning of the year, profits for the current year, less dividend paid,
capital contributed during the year if any)
Q90. What will be included in the Current Liabilities?
Ans. Under the current liabilities, we will include the amount for creditors/payables which is 10,000 in
the above case.
Q91. What do you mean by Days Payable Outstanding (DPO)?
Ans. DPO or Days Payable Outstanding refers to the average number of days that ideally a company
takes to clear its credit purchase in regards to the outstanding suppliers. Most of the time, DPO is a
monthly task for a business, however, each month the day of clearing the outstanding payment might
differ, hence the average is taken out to estimate the payment period.
Below is the formula for calculating DPO:
Closing accounts payable / Purchase per day Or (Average accounts payable / COGS) X Number of days
Q92. Find out the DPO in the below query.
Ans.
Average accounts payable in June 50,000
Cost of Goods sold in June 5,00,000
As the month of June has 30 days the DPO will be:
(50,000/5,00,000)*30 = 3 days
Hence, the DPO in the above situation is 3 days. This states that a company takes 3 days on average to
clear all its pending invoices.
Q93. What are the different types of liquidity ratios in accounting?
Ans. Basically, there are five different types of ratios in accounting:
Current Ratio
The higher the company has current ratio, the better is the company’s strength to handle short-term
financial issues. It is calculated by – Current ratio = Current Asset/ Current Liabilities
Net-Working Capital Ratio
It articulates whether or not a company has sufficient funds to carry out short-term operations. It is
calculated by – Current Asset – Current Liabilities
Quick ratio
The quick ratio is also known as the acid test ratio or liquid ratio which illustrates the company’s short-
term liquidity to meet any short-term obligations. If the quick ratio is below 1:1, the company is not in a
good state to handle short-term debts. Quick ratio = Liquid Assets / Current Liabilities
Super-Quick Ratio
Super Quick Ratio = (Cash + Marketable Securities) / Current Liabilities
The operating Cash Flow ratio
It is calculated by dividing cash flow from operations with current liabilities. It is observed that a sound
operating cash flow ratio makes the firm’s liquidity position better.
Here cash flow from operations will generally include:
All revenues from operations + Non-cash based expenses – Non-cash based revenue
Whereas Current Liabilities will include:

Balance payments, creditors, provisions, short term loans, etc.
Q94. What is the Accounting Information System (AIS)?
Ans. This is a frequently asked accounting interview question thus you should know everything about
AIS.
AIS is a computer-based method used for tracking accounting activity and involves – collecting, storing,
processing, organizing, and summarizing accounting data and transactions. It also helps in cumulating
financial transactions and essential financial reports, which helps stakeholders in decision making. Using
AIS for storing and processing financial data helps in the following tasks:
Measure the financial performance
Evaluate the finances of the company and compare it with the previous period to draw a conclusion
Avoid any miss-handling of data
Connects Information Technology with GAAP principles
Q95. What do you mean by tangible real accounts and intangible real accounts?
Ans. To answer this accounting interview question, give a brief explanation and highlight with examples.
Tangible Real Account – Those assets which can be touched and have a physical existence are defined as
tangible real accounts.
Example – Machinery A/c, Vehicle A/c, Building A/c
Journal Entry –
Debit what comes in
Credit what goes out
Intangible real account – Those assets which have some monetary values but can’t be touched are
referred to as intangible real accounts.
Example – Goodwill, Patents, Copyrights
Journal Entry –
Debit what comes in
Credit what goes out
Q96. How to perform an income statement analysis?

Ans. The income statement is the company’s core financial statement highlighting the profits and losses
of the company. It involves:
All revenues – expenses (both operating and non-operating activities)
To analyze this statement, financial analysts consider vertical analysis and horizontal analysis.
Vertical analysis:
It involves comparing the up and down of the income statement to the revenue (in percentage). The key
metrics involved are:
Cost of Goods Sold (COGS)
Gross profits
Depreciation
Interest
Earnings Before Tax (EBT)
Tax
Net earnings
Horizontal analysis
It involves comparing the year-over-year (YoY) change of each line in the income statement. To perform
this analysis:
Take the value in Period N and
Divide it by value in Period N-1
Subtract the value by 1 (gives the percent change)
To learn more about how to conduct a financial analysis you can consider taking the following courses:
Financial Analysis Fundamentals by CFI
Valuation and Financial Analysis For Startups Specialization by Coursera
Q97. What is Section 209(4A) in The Companies Act, 1956?
Ans. This is a common accounting interview question for beginners as well as experts. Emphasise on
your knowledge as much as you can here. Section 209(4A) in The Companies Act, 1956 states that:
Every company must preserve the books of accounts, together with the vouchers relevant to any entry
in such books of account, in good order, relating to a period of not less than 8 years immediately
preceding the current year.
So of the Current Year Ending is – March 2020 then, the company needs to store the accounts and
vouchers for the following years:
March 2019, 2018, 2017,……, to 2012
Q98. Which latest accounting trends do you think are prevailing in 2021 and continuing in 2022? [one of
the most frequently asked accounting interview questions]
Ans. This accounting interview question is for beginners and experts. For professionals in the field,
keeping track of trends is crucial. Below are some of the latest accounting trends:
Increased dependency on cloud
Companies are now using cloud computing as a technology for tracking – tracking inventory, sales, and
expenses. A report by Accounting Age suggests that 78% of small businesses will rely solely on cloud
technology and 67% of accountants say that cloud technology will make their role easier.
Automated data entry
As per the Practice of Now 2020 survey, nearly two-thirds of accountants consider automation of
processes, workflows, and payments the biggest challenge that will impact accountancy in the next 12
months. That’s why a lot of companies have started depending upon automation software as they are
efficient and reduce the chances of error or loss of entry.
For this interview question on accounting trends, try mentioning some more. Some of the other trends
that are catching up this year are
Data analytics for risk management and forecasting
Use of ERP
Blockchain technology adoption
Q99. 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.
Q100. 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 amount is always equal to the total credit. In this system, when one account is
debited then another account gets credited at the same time.
Q101. Briefly explain the procurement process.
Ans. The procurement process begins with a purchase request for a particular apartment. This is then
verified and approved. Based on the purchase request, a purchase order is created for the items already
purchased.
In this step, it is the responsibility of the facilities and administrative team to verify rates, delivery
milestones, place of delivery, supplier payment terms, contractual obligations, etc., and then issue a
purchase order to the supplier. The seller will accept the purchase order.
Q102. Why do you want to join this company?
Ans. Interviewers want to know that you’re genuinely interested in working for their organization. To
give a thorough answer, research the company’s website to learn more about its goals, mission, and
work environment. Choose one or two things that you like the most and explain why they make you
want to work for the company.
Q103. Where do you see yourself in five years?
Ans. It is a question that interviewers ask in all sectors, but in accounting, it takes on special relevance.
Without a doubt, this is the perfect time to show your ambition. Therefore, try to give a modest and
truthful answer in which you highlight your desire to occupy a position in the company to boost your
career and serve as a key point in your career. It is ideal that you mention your strengths and
weaknesses, and how you are motivated to turn your weaknesses into strengths in your career.
Q104. Share a stressful situation that you have been a part of and how you have handled the situation.
Ans. In the field of accounting and finance, you are constantly under pressure. It’s not a job to be taken
lightly, which is why interviewers ask such basic accounting interview questions, just to assess your
composure in times of stress. Be careful to bring up a really stressful situation and don’t worry about the
work pressure they have faced on a day-to-day basis, as no one wants to hire someone who can’t handle
work pressure.
Also, be realistic about the stressful situation you mention. You shouldn’t sound fake. The situation can
be one of employee fraud, massive damage to the company due to natural calamities, scrutiny of the
income tax of years when you were not even part of the organization, etc.
Q105. Have you ever helped your company to save money or use their available financial resources
effectively?
Ans. Explain if you have proposed an idea that has affected the company’s finances positively. Tell how
you have optimized the process and how you came to such a decision through a historical data review.
Q106. How do you minimize the risk of making mistakes in your work? Ans. As an accountant, you would
need to showcase the highest degree of excellence, since even the smallest error can lead to chaos.
When answering this question, emphasize that you are in charge of reviewing the work several times
before sending it and that you have a system of pros and cons that leads you to make decisions. Do not
hesitate to give an example of some occasion in which you detected an error through the double control
formula.
Q107. How does OPEX differ from Capital Expenses?
Ans. OPEX is the abbreviation for operating expenses that refers to the costs a company incurs on a
regular basis. But just don’t limit your response to this definition. Give numerous examples ranging from
utilities, insurance, license fees, and inventory costs to property taxes.
Capital Expenses are the other costs associated with a business investment that promises benefits in the
future. Some examples are real estate, upgrading furniture or exteriors of property for higher
appreciation, etc.
After a brief explanation of the two, do mention that generally, capital expenses are higher than
operating expenses and how these two are taxed differently.
Q108. Tell us about the importance and benefits of fixed asset register maintenance
Ans. You already know that any investment that generates income is a fixed asset. It can be property,
workplace equipment, or similar.
So you can say, a fixed asset register helps a company maintain accurate accounting information for
future decision-making.
Apart from that, a fixed asset register can be managed with simple spreadsheet software such as
Microsoft Excel, or when the organisation is expanding, it can be easily integrated into proper
accounting software. Even for a small enterprise, it can make it simpler to calculate annual depreciation.
You can also add that a company should maintain an IT asset register maintenance in order to avoid
compliance-related penalties.
Q109. How would you calculate the debt-to-equity ratio?
Ans. The debt-to-equity ratio is the percentage of an organisation’s debt in relation to its shareholder’s
equity.
The best response would be to show your prospective employer how it is calculated through the
formula:
Debt-to-equity = Total debt/Shareholder’s Equity
To add some competitive advantage, you can also mention that the higher the ratio, the higher is the
organisation’s risk.
Q110. Briefly explain IFRS and why it is necessary for accounting.

Ans. IFRS stands for International Financial Reporting Standards. So, highlight your response with how
this accounting framework has been issued by the International Accounting Standards Board to set
common global standards.
Coming to its significance, mention that IFRS makes international capital transactions convenient
through the maintenance of balance sheets and statements of profits and losses.
Overall, this framework supplements transparency, efficiency and accountability. You can further
expand on these points through relevant examples.
Q111. What are the 4 main standard requirements of IFRS?
Ans. This is a general accounting interview question. To answer, just memorise the following four basic
IFRS requirements that are derived from important principles such as transparency, relevance,
trustability and similitude.
Financial Position Statement
Income Statement
Equity Changes Statement
Cash Flows Statement
Q112. What is IASB?
Ans. As this is another textbook accounting interview question, simply mention that IASB stands for
International Accounting Standards Board. Also mention that this privately operated body creates and
sanctions IFRS and is controlled by IFRS Foundation.
Q113. How do you bridge the gap when you are trying to make an individual with no accounting
knowledge grasp complex accounting concepts?
Ans. Here the recruiter is gauging your communication skills.
Try giving an in-depth answer to this question. To provide strategic advice, you can highlight that you
don’t use figures and accounting terms, which will show that you are trying to understand their pain
points.
When you can say that you simplify the technical terms through anecdotes or analogies, it only shows
you are clear with the accounting concepts.
Another appropriate response would be that you choose to write summaries and/or use PPTs for non-
accounting professionals across different departments. This displays your patience and teamwork.
Q114. How do you calculate Earnings Per Share? Ans. Earnings Per Share or EPS is the amount that the
shareholder will earn from the earnings of the company. It is calculated by the following formula:
EPS = (Net Income – Preferred Dividends)/Average outstanding common shares
Q115. Why does a company require different budgeting methods? Name the most important ones.
Ans. Calculating a company’s budget through efficient budgeting methods prevents future bankruptcy.
Activity-based, zero-based, incremental and value proposition are the four main types of budgeting
methods. It would be ideal if you explain these four through examples.
Q116. What are the main differences between US GAAP and Indian GAAP?
Ans. Indian GAAP follows the accounting standards of the Institute of Chartered Accountants of India
(ICAI), while US GAAP follows the Financial Accounting Standards Board (FASB).
You can further highlight the technical differences between the two based on the table below:
Indian GAAP US GAAP
Investment & Marketable securities The income statement only recognises the unrealised depreciation
on Available-For-Sale securities Appreciation and depreciation fall under Other Comprehensive Income
Format of financial statements Follows Companies Act of 1956 under presentation requirements of
Schedule VI No specific format
Depreciation Based on rates prescribed in the Companies Act, 1956 Tentative period of an asset
Subsidiary Accounts Consolidation Not mandatory It is mandatory
Q117. Name some of the Enterprise Resource Planning systems you have used.
Ans. Small companies hardly use ERP systems. If your previous job was in one, you can be completely
honest that you are willing to learn about ERP systems.
However, if you are experienced with Microsoft Dynamics GP or any other Enterprise Resource Planning
system, mention how you were using it. This will help your employer understand how much more you
need to know about them.
Q118. Which skills do you consider important as an accounting professional when you are working
remotely?
Ans. Your answer to this question will determine your soft skills.
Since the work environment currently remains unpredictable, you need to highlight how you can work
around this issue productively.
Showing adaptability, the ability to take on new challenges and diplomatic teamwork are among the
most desirable characteristics for accounting professionals of any level.
Q119. Name some common ways of identifying fraudulent entries.
Ans. With this accounting interview question for senior-level positions, the employer wants to know
how attentive the candidate is to journal entries and ledgers. Awareness of different types of fraud
behaviours and fraud monitoring/prevention methods are important. For instance, say,
I know some of the most common fraudulent behaviours such as
Out-of-period revenues are used for recording inflated revenue.
To show earnings, the cost of repairs is used as fixed assets.
Liabilities are not present on the balance sheet.
Sometimes, expenses also can be shown as earnings when they are recategorised as company reserves.
To detect fraud, I follow these preventive measures:
First, I understand the organisation’s financial reporting process.
I also select journal entries for testing.
Interview individuals directly who have been involved in the financial reporting process.
Q120. How do you manage deadlines with multiple accounting projects?
Ans. This accounting interview question is for the experienced who know how to prioritise their work.
You can mention the following:
I lay out the time-sensitive tasks first and complete them.
I can multitask without hampering the quality of another project at hand.
I identify repeatable tasks such as sales proposals and client billing and turn them into the standard
operating procedure (SOP). So each time I do these, I don’t have to start from scratch.
I use time-tracking apps for each project.
Q121. What exactly is double-entry? How are transactions recorded in such an accounting system?
Ans. This is a very common accounting interview question for accountants of all levels. Double entry is
one of the oldest accounting systems. It simply means that for every accounting entry there is a
corresponding entry into a different account. In this system, all transactions are recorded as credits and
debits. This bookkeeping method relies on the fundamental accounting equation –
Assets = Liabilities + Equity of the Shareholder
To explain how it works, you can give this example:

Suppose, ABC Company purchases Rs.5000 worth of office supplies by paying cash upfront. In this case,
ABC Company’s asset account is required to increase by Rs.5000, while cash will need to decrease by
Rs.5000. The asset account will be debited, while the cash amount will be credited. Here, the debit
amount is always equal to the credit amount.
Q122. Name at least five different types of accounts in double-entry bookkeeping.
Ans. The five main types of accounts used are:
Liability Account – When a company owes money to other businesses and will pay at a later date, it uses
a liability account.
Capital Account – A capital account determines the net worth over a specific period, commonly during a
year. These accounts include the shareholder’s equity.
Expense Account – This type of account includes a company’s daily operation costs. The costs can be for
money spent on advertising or other expenses that are administrative in nature.
Income Account – This account shows what a company has earned over a specific period. It records the
sources where the money originates from as well as the revenue gained for the sale of
products/services.
Asset Account – It refers to any cash or goods a company owns.
Q123. What differentiates contingent liability from bad debts?
Ans. This accounting interview question is asked to understand whether you are well aware of the
difference between very similar concepts.
Contingent liability is not recorded on a balance sheet. It is simply the result of a record that may not
occur. On the other hand, bad debt is recorded at the same time when there is a sale.
Q124. Why are financial projections required in accounting?
Ans. A financial projection is necessary for managing any business, be it, small, medium or large. It
shows forecasts on financial estimates including revenues and financial statements’ expenses. It takes
into account the analysis of historical data and predicts different factors in the market outside a
business. Typically financial projections include the following:
Income Statement projection – It includes expenses, revenues, total income (Revenue – Expenses),
income tax and net income over a particular period.
Cash flow projection – It includes cash revenues and cash disbursements.
Balance Sheet projection – The balance sheet determines a business’s net worth. It includes assets,
liabilities and equity.
If you are a senior accountant candidate, support this accounting interview question with the
importance of financial projections such as:
With a financial projection, it is convenient for investors to know a business will operate.
A financial projection can predict potential risks in business operations much before.
A business can prepare a clear budget with a financial projection.
Also, explore Risk Management courses
The Parting Note
Going through the above accounting interview questions will probably have given you an idea of the
type of accounting interview questions that are asked during an accounting interview. These detailed
answers to 122 accounting interview questions will also help you to freshen up your accounting
knowledge.
FAQs for Accounting
1. Who is an accountant?
Ans. An accountant is a professional who maintains and interprets the financial records of an
organization. Such a finance professional is responsible for a wide range of finance-related tasks. Some
of the main types of accountants are:
Certified Public Accountant
Management Accountant
Government Accountant
Cost Accountant
Project Accountant
2. How can I learn accounting without an accounting background?
Ans.
1. Learn how to read and analyze financial statements
2. Become familiar with creating spreadsheets
3. Read books on accounting
4. Take an online accounting course
5. Focus on real-world application of financial accounting principles and equations

6. Network with other accounting professionals
3. How should I prepare for an accountant interview?
Ans.
1. Know why you want to be an accountant
2. Brush up on the basics
3. Be prepared with a story, about a time you solved some major technical problems
4. Cite specific examples, talk about some of the projects where you excelled at
5. Demonstrate your value
6. Be prepared with specific questions to show that you are engaged, thoughtful and detail-oriented
7. Reach before time
8. Research the company well
9. Be confident
4. Why should I become an accountant?
Ans.
1. You don’t need to have a math degree
2. Employment opportunities are available across different industries
3. It’s more about advice than number-crunching
4. You can become an entrepreneur and even work for charity
5. Accountants are in demand, always
6. It’s (almost) recession-proof
5. Which popular accounting tools I must be aware of?
Ans. Some of the popular accounting tools are –
1. Sage Accounting
2. FreshBooks
3. QuickBooks Online
4. Xero
5. Sage 300
6. Sighted
7. WagePoint
8. TSheets
9. Gusto
10. SurePayroll
11. Expensify
12. Neat
6. Should I go for ACCA, CFA, CPA, IFRS, CIMA, FRM or other accounting/ finance certifications?
Ans. All are useful to fast-track your career in accounting and finance. You can find these courses online,
offered by Coursera, edX, Udemy and more. Some of these online courses are also accredited by top
universities.
7. What is the basic eligibility to become an accountant?
Ans. There is no specific educational requirement to become an accountant. However, if you consider
seeking admission to any undergraduate accounting course, you should have completed your 10+2 or
equivalent with subjects such as Accounts, Economics and Mathematics.
8. What is the average salary of an accountant in India?
Ans. The average base salary of an accountant in India is around Rs.2,49,509 per year (according to
Payscale). It increases exponentially with a few years of experience.
9. How long does it take to complete an online accounting course?
Ans. It depends on the course provider and the specialisation. In general, some take about 6 months,
while others can take a year.
10. What are the common mistakes in accounting?
Ans.
1. Mixing personal accounts with that of the company
2. Little communication between the company and the accountant

3. Not keeping a backup
4. Misallocated resources
5. Not saving the receipts
6. Performing manual accounting
7. Not keeping the accounting books up to date
11. Should I complete an e-GST course or a Microsoft Excel course to become an accountant?
Ans. Both are good. Doing an Excel course will help you apply formulae, and tables for calculations. An e-
GST course will train you on composition schemes, taxes, and filings, etc. Together they would give an
edge to your career.
Meaning of Average Cost
It is the per unit cost of production obtained by dividing the total cost (TC) by the total output (Q) or
mathematically expressed, AC = TC/Q.
Also, Average Cost (AC) = Average Variable cost (AVC) + Average Fixed cost (AFC) Where, Average
variable cost refers to the variable expenses per unit of output. AFC= Total Variable Cost (TVC) / Total
output (Q) Average fixed cost refers to fixed cost per unit of output. AVC = Total Fixed Cost (TFC) / Total
output (Q) It is also called Per Unit Total Cost.
Average cost is an important factor in determining the supply and demand within the market.
Types of Average Cost
Average cost can be divided into short-run and long-run average costs Short-run average cost- varies
with the production of goods, provided the fixed costs are zero, and the variable costs are constant.
Long-run average cost- includes all the cost involved in the variation of the quantities of all the inputs
used for production of goods. The long run average costs help in determining economies of scale of the
firm.
Average Total Cost
Average total cost refers to cost per unit of output. It includes both fixed and variable costs. As the
output of a firm increases, average total cost like the average variable cost decreases in the beginning
reaches a minimum and then it increases.
Average Cost v. Marginal Cost
Average cost is the total cost per unit of output, whereas marginal cost is the cost of producing an
additional unit of a product or service.
Average Cost Method

This method assigns cost to the inventory items based on the total cost of goods purchased or produced
within a period divided by the total number of items that are purchased/ produced in a stipulated time
period. This method is also known as the weighted average method. The average cost method is one of
three inventory valuation methods.
Consignment account is prepared to ascertain the profit earned or loss incurred by the consignor on a
specific consignment. This account can be viewed as a combined trading and profit and loss account
prepared specifically for consignment business.
The nature of the consignment account is nominal which means it is drawn up to show the results of the
consignment business for a specific period.
If consignor sends goods to more than one consignees working in different cities or areas, a separate
consignment account is required for each consignment so that the profit or loss for each consignment
can be determined separately. If consignor maintains more than one consignment accounts, he can
distinguish them from each other by adding to the account title the name of the consignee or the name
of the city or area to which the particular consignment belongs. For example, Consignment to David,
Consignment to John, Consignment to Ottawa and consignment to New York etc.
Debit and credit entries in a consignment account
The entries in the consignment account are made on the basis of consignor’s own record as well as
account sales sent by the consignee. The debit and credit entries are made as follows:
Debit entries
The common entries that appear on the debit side of a consignment account are listed below:
Opening stock of goods (if any)
Total cost of goods sent on consignment
All the expenses incurred by consignor such as loading, freight, insurance etc.
All the expenses paid by consignee such as unloading, freight, godwon rent, warehousing and storage,
marketing expenses, packaging and selling expense etc.
Bad debts regarding consignment sales.
Consignee’s ordinary and del credere commission at agreed rate on sale proceeds.
Credit entries
The usual items that appear on the credit side of a consignment account are listed below:
Gross sale proceeds
Closing stock of goods (if any)

Abnormal loss of goods
Stock in transit (if any)
The balance of consignment account represents a profit or a loss on consignment and is transferred to
“Profit and Loss on Consignment Account“. The consignment account is thus closed.
The Profit and Loss on Consignment Account is also a nominal account. If there are more than one
consignments, the balances of all consignment accounts are transferred to this account.The profit and
loss on consignment account is closed at the end of the year by transferring its balance to the General
Profit and Loss Account.
TERMS TO KNOW
1. Consignor: It is the person that sends goods.
Consignee: The person who receives the goods is called the consignee.
2. Consignment: Consignment is a business arrangement through which the consignor sends goods to
the consignee for sale.
3. Consignment Agreement: It is a legally written communication between the consignor and consignee,
which defines the terms and conditions of the consignment.
Pro-Forma Invoice: When the consignor sends goods to the consignee, he also forwards statements
showing details of goods such as quantity, price, etc., and that statement is called the Pro-forma invoice
4. Non-Recurring Expenses: Expenses that the consignor incurs to dispatch the goods from his place to
the consignee’s place are called non-recurring expenses. These expenses are added to the cost of goods.
5. Recurring Expenses: The consignee incurs these expenses after the goods reach his place. These
expenses are maintenance of goods type expenses.
6. Commission: Commission is the reward/ consideration for the sale of goods on behalf of the
consignor. It is as per the consignment agreement.
Account Sale: It is the statement forwarded by the consignee to the consignor showing details of goods
sold, amounts received, expenses incurred, a commission charged, advance payment
and balance due and stock in hand, etc.
What is Branch Accounting
Definition: Branch accounting is defined as an accounting system wherein separate records or accounts
are kept up with for each branch office. In the branch accounting process, branches separately create
Trial Balances, Balance Sheets, and Profit and Loss account statements.
It is mainly associated with the efficient internetworking between a branch and head office in which
each branch office will be keeping their books as per the generally accepted accounting principles and
then they will be sending them to the head office, so those branch account particulars can be combined
with those of other units.
Two types of branches that are prevalent are-
Dependent Branch
Such branches don’t keep up with independent accounting books and the head office manages their
profit and loss statements as well as balance sheets. Just a few information and data like Cash
Accounting, Debtors Accounting, and Inventory are managed by branches independently.
Independent Branch
Such branches that keep up with separate books of accounts eventually, and hence their balance sheet
and profit and loss financial statements are managed independently. For this situation, the branch office
and head office are treated as isolated entities. Branch accounting is preferably used in independent
branches.
What is Amortization?
Amortization is the process of incrementally charging the cost of an asset to expense over its expected
period of use, which shifts the asset from the balance sheet to the income statement. It essentially
reflects the consumption of an intangible asset over its useful life. Amortization is most commonly used
for the gradual write-down of the cost of those intangible assets that have a specific useful life.
Examples of intangible assets are patents, copyrights, taxi licenses, and trademarks. The concept also
applies to such items as the discount on notes receivable and deferred charges.
The amortization concept is also used in lending, where an amortization schedule itemizes the beginning
balance of a loan, less the interest and principal due for payment in each period, and the ending loan
balance. The amortization schedule shows that a larger proportion of loan payments go toward paying
off interest early in the term of the loan, with this proportion declining over time as more and more of
the loan's principal balance is paid off. This schedule is quite useful for properly recording the interest
and principal components of a loan payment.
The Difference Between Depreciation and Amortization
The difference between depreciation and amortization is that amortization is associated with charging
intangible assets to expense over time, and depreciation is associated with charging tangible assets to
expense over time. Similarly, depletion is associated with charging the cost of natural resources to
expense over their usage period.
What is the First-in, First-out Method?

The first in, first out (FIFO) method of inventory valuation is a cost flow assumption that the first goods
purchased are also the first goods sold. In most companies, this assumption closely matches the actual
flow of goods, and so is considered the most theoretically correct inventory valuation method. The FIFO
flow concept is a logical one for a business to follow, since selling off the oldest goods first reduces the
risk of inventory obsolescence.
Understanding the First-in, First-out Method
Under the FIFO method, the earliest goods purchased are the first ones removed from the inventory
account. This results in the remaining items in inventory being accounted for at the most recently
incurred costs, so that the inventory asset recorded on the balance sheet contains costs quite close to
the most recent costs that could be obtained in the marketplace. Conversely, this method also results in
older historical costs being matched against current revenues and recorded in the cost of goods sold;
this means that the gross margin does not necessarily reflect a proper matching of revenues and costs.
For example, in an inflationary environment, current-cost revenue dollars will be matched against older
and lower-cost inventory items, which yields the highest possible gross margin.
The FIFO method is allowed under both Generally Accepted Accounting Principles and International
Financial Reporting Standards. The FIFO method provides the same results under either the periodic or
perpetual inventory system.
Example of the First-in, First-out Method
Milagro Corporation decides to use the FIFO method for the month of January. During that month, it
records the following transactions:
The cost of goods sold in units is calculated as:
100 Beginning inventory + 200 Purchased – 125 Ending inventory = 175 Units
Milagro’s controller uses the information in the preceding table to calculate the cost of goods sold for
January, as well as the cost of the inventory balance as of the end of January.
Thus, the first FIFO layer, which was the beginning inventory layer, is completely used up during the
month, as well as half of Layer 2, leaving half of Layer 2 and all of Layer 3 to be the sole components of
the ending inventory.
Note that the $42,000 cost of goods sold and $36,000 ending inventory equals the $78,000 combined
total of beginning inventory and purchases during the month.
What is Last In, First Out (LIFO)?
The last in, first out method is
used to place an accounting value on inventory. The LIFO method operates under the assumption that
the last item of inventory purchased is the first one sold. Picture a store shelf where a clerk adds items
from the front, and customers also take their selections from the front; the remaining items of inventory
that are located further from the front of the shelf are rarely picked, and so remain on the shelf – that is
a LIFO scenario.
The trouble with the LIFO scenario is that it is rarely encountered in practice. If a company were to use
the process flow embodied by LIFO, a significant part of its inventory would be very old, and likely
obsolete. Nonetheless, a company does not actually have to experience the LIFO process flow in order
to use the method to calculate its inventory valuation.
Effects of LIFO Inventory Accounting
The reason why companies use LIFO is the assumption that the cost of inventory increases over time,
which is a reasonable assumption in times of inflating prices. If you were to use LIFO in such a situation,
the cost of the most recently acquired inventory will always be higher than the cost of earlier purchases,
so the ending inventory balance will be valued at earlier costs, while the most recent costs appear in the
cost of goods sold. By shifting high-cost inventory into the cost of goods sold, a company can reduce its
reported level of profitability, and thereby defer its recognition of income taxes. Since income tax
deferral is the only justification for LIFO in most situations, it is banned under international financial
reporting standards (though it is still allowed in the United States under the approval of the Internal
Revenue Service).
Alternative Costing Methods
A more realistic cost flow assumption is incorporated into the first in, first out (FIFO) method. This
approach assumes that the oldest inventory items are used first, so that only the newest inventory items
remain in stock. Another option is the weighted average method, which calculates the average cost for
all items currently in stock.
Example of the Last-in, First-out Method
Milagro Corporation decides to use the LIFO method for the month of March. The following table shows
the various purchasing transactions for the company’s Elite Roasters product. The quantity purchased on
March 1 actually reflects the inventory beginning balance.
The following bullet points describe the transactions noted in the preceding table:
March 1. Milagro has a beginning inventory balance of 150 units, and sells 95 of these units between
March 1 and March 7. This leaves one inventory layer of 55 units at a cost of $210 each.
March 7. Milagro buys 100 additional units on March 7, and sells 110 units between March 7 and March
11. Under LIFO, we assume that the latest purchase was sold first, so there is still just one inventory
layer, which has now been reduced to 45 units.
March 11. Milagro buys 200 additional units on March 11, and sells 180 units between March 11 and
March 17, which creates a new inventory layer that is comprised of 20 units at a cost of $250. This new
layer appears in the table in the “Cost of Layer #2” column.
March 17. Milagro buys 125 additional units on March 17, and sells 125 units between March 17 and
March 25, so there is no change in the inventory layers.
March 25. Milagro buys 80 additional units on March 25, and sells 120 units between March 25 and the
end of the month. Sales exceed purchases during this period, so the second inventory layer is
eliminated, as well as part of the first layer. The result is an ending inventory balance of $5,250, which is
derived from 25 units of ending inventory, multiplied by the $210 cost in the first layer that existed at
the beginning of the month.
12 Branches of Accounting
1. Financial accounting
It revolves around recording and clarifying business transactions alongside the preparation and
presentation of the company’s financial statements. It follows GAAP principles and pays heed to the
historical data. Key business information that financial accounting provides is essential for creditors,
regulators, banks of financial institutions, tax professionals, suppliers, etc.
2. Managerial accounting
It is used for providing information to a company’s internal structure such as management. It monitors
the use of money. It pays heed to the needs of management, but it is not inevitable for managerial
accounting to follow GAAP accounting rules.
3. Cost accounting
You may understand it as a subset of management accounting that gives full attention to the evaluation
of costs. It performs financial analysis of all factors of manufacturing costs for accurately finding out the
cost of a project.
4. Auditing
This branch of auditing is used for examining and monitoring a business to have accurate reports
financial records, financial integrity, and compliance with tax laws and regulations. External auditing and
internal auditing are the two types of auditing that are used.
5. Tax accounting
This branch of accounting is known for following the state and federal tax rules in the process of tax
planning or tax returns. It gives full attention to the effect of taxes on a business, plus it also offers
advisory services on the right ways of minimizing taxes or understanding outcomes of tax decisions.
6. Fiduciary accounting
It is used for handling the accounts entrusted to an individual who is given responsibility for the custody
or management of the property. It is typically used for servingProject accounting
It is used for the accounting of different projects related to construction or engineering. Project
accounting can be understood as an integral part of the project management umbrella. It is useful in
tracking a project’s financial progress.
8. Forensic accounting
It is also popularly known as legal accounting and is used for handling legal matters associated with
bankruptcy, mismanagement, and fraud. It is used for serving lawyers, insurance companies, law
enforcement, financial institutions, government organizations, etc.
9. Fund accounting
This type of accounting comes into play with non-profit organizations (NPO) for ensuring the correct and
accurate funds allocations. It is used for ensuring NPO funds go where they should go via the separation
and distribution of funds as per laws governing NPOs or company policies. It is generally used by
charities, educational institutions, churches, clubs, hospitals, government agencies, etc.
10. Government accounting
It is used for managing and recording state and federal fund allocation and disbursement. It revolves
around different aspects of social accounting and the measurement of cost to humans. It is associated
with federal land use, use of welfare funds, climate change, healthcare, housing, education, etc. It is also
used for tracking the money movement via different agencies and fulfilling budget requirements.
11. Political campaign accounting
This accounting branch is used for overseeing the development and implementation of the finance
systems of a political campaign. It might cover transaction accounting, donation monitoring, and
ensuring compliance with federal and state laws that govern political campaigns.
12. International accounting
This type of accounting is used for learning laws and regulations in other countries for conducting
business honestly and fairly. It follows GAAP as well as International Financial Reporting Standards
(IFRS). trusts, estates, and receiverships.
What is a Controllable Cost?
Controllable costs are those costs that can be altered in the short term. More specifically, a cost is
considered to be controllable if the decision to incur it resides with one person. If the decision instead
involves a number of individuals, then a cost is not controllable from the perspective of any one
individual. Also, if a cost is imposed on an organization by a third party (such as taxes), this cost is not
considered to be controllable. Examples of controllable costs are advertising, bonuses, direct materials,
donations, dues and subscriptions, employee compensation, office supplies, and training.
What is a Non-Controllable Cost?
A non-controllable cost is an expense that is not within the sphere of control of a manager. The cost may
be controllable at a higher level of the organization, but it is not controllable from the perspective of the
person in question. For example, a manager cannot alter his own salary. Or, a department manager has
no control over the rent charge that is allocated to his department for office space used. The proportion
of non-controllable costs in a manager's budget dictates the extent to which he can influence the
expense level of his department.
Manufacturing Account
Manufacturing account prepared in a case where goods are manufactured by the firm itself.
Manufacturing accounts represent cost of production. Cost of production then transferred to Trading
account where other traded goods also treated in a same manner as Trading account.
Important Point Related to Manufacturing Account
Apart from the points discussed under the section of Trading account, there are a few additional
important points that need to be discuss here −
Raw Material − Raw material is used to produce products and there may be opening stock, purchases,
and closing stock of Raw material. Raw material is the main and basic material to produce items.
Work-in-Progress − Work-in-progress means the products, which are still partially finished, but they are
important parts of the opening and closing stock. To know the correct value of the cost of production, it
is necessary to calculate the correct cost of it.
Finished Product − Finished product is the final product, which is manufactured by the concerned
business and transferred to trading account for sale.
Raw Material Consumed (RMC) − It is calculated as.
RMC = Opening Stock of Raw Material + Purchases - Closing Stock
Cost of Production − Cost of production is the balancing figure of Manufacturing account as per the
format given below.
Profit and Loss Account
Profit & Loss account represents the Gross profit as transferred from Trading Account on the credit side
of it along with any other income received by the firm like interest, Commission, etc.
Debit side of profit and loss account is a summary of all the indirect expenses as incurred by the firm
during that particular accounting year. For example, Administrative Expenses, Personal Expenses,
Financial Expenses, Selling, and Distribution Expenses, Depreciation, Bad Debts, Interest, Discount, etc.
Balancing figure of profit and loss accounts represents the true and net profit as earned at the end of
the accounting period and transferred to the Balance Sheet.
Trading Account
Trading accounts represents the Gross Profit/Gross Loss of the concern out of sale and purchase for the
particular accounting period.
Study of Debit side of Trading Account
Opening Stock − Unsold closing stock of the last financial year is appeared in debit side of the Trading
Account as “To Opening Stock“ of the current financial year.
Purchases − Total purchases (net of purchase return) including cash purchase and credit purchase of
traded goods during the current financial year appeared as “To Purchases” in the debit side of Trading
Account.
Direct Expenses − Expenses incurred to bring traded goods at business premises/warehouse called direct
expenses. Freight charges, cartage or carriage charges, custom and import duty in case of import, gas,
electricity fuel, water, packing material, wages, and any other expenses incurred in this regards comes
under the debit side of Trading Account and appeared as “To Particular Name of the Expenses”.
Sales Account − Total Sale of the traded goods including cash and credit sales will appear at outer
column of the credit side of Trading Account as “By Sales.” Sales should be on net releasable value
excluding Central Sales Tax, Vat, Custom, and Excise Duty.
Closing Stock − Total Value of unsold stock of the current financial year is called as closing stock and will
appear at the credit side of Trading Account.
closing Stock = Opening Stock + Net Purchases - Net Sale
Gross Profit − Gross profit is the difference of revenue and the cost of providing services or making
products. However, it is calculated before deducting payroll, taxation, overhead, and other interest
payments. Gross Margin is used in the US English and carries same meaning as the Gross Profit.
Gross Profit = Sales - Cost of Goods Sold
Operating Profit − Operating profit is the difference of revenue and the costs generated by ordinary
operations. However, it is calculated before deducting taxes, interest payments, investment
gains/losses, and many other non-recurring items.
Operating Profit = Gross Profit - Total Operating Expenses
Net Profit − Net profit is the difference of total revenue and the total expenses of the company. It is also
known as net income or net earnings.
Net Profit = Operating Profit - (Taxes + Interest)
Capital Expenditure
Capital expenditure is the expenditure incurred to acquire fixed assets, capital leases, office equipment,
computer equipment, software development, purchase of tangible and intangible assets, and such kind
of any value addition in business with the purpose to enhance the income. However, to decide nature of
the capital expenditure, we need to pay attention on −
The expenditure, which benefit cannot be consumed or utilized in the same accounting period, should
be treated as capital expenditure.
Expenditure incurred to acquire Fixed Assets for the company.
Expenditure incurred to acquire fixed assets, erection and installation charges, transportation of assets
charges, and travelling expenses directly relates to the purchase fixed assets, are covered under capital
expenditure.
Capital addition to any fixed assets, which increases the life or efficiency of those assets for example, an
addition to building.
Revenue Expenditure
Revenue expenditure is the expenditure incurred on the fixed assets for the ‘maintenance’ instead of
increasing the earning capacity of the assets. Examples of some of the important revenue expenditures
are as follows −
Wages/Salary
Freight inward & outward
Administrative Expenditure
Selling and distribution Expenditure
Assets purchased for resale purpose
Repairs and renewal expenditure which are necessary to keep Fixed Assets in good running and efficient
conditions
Revenue Expenditure Treated as Capital Expenditure
Following are the list of important revenue expenditures, but under certain circumstances, they are
treated as a capital expenditure −
Raw Material and Consumables − If those are used in making any fixed assets.
Cartage and Freight − If those are incurred to bring Fixed Assets.

Repairs & Renewals − If incurred to enhance life of the assets or efficiency of the assets.
Preliminary Expenditures − Expenditure incurred during the formation of a business should be treated as
capital expenditure.
Interest on Capital − If paid for the construction work before the commencement of production or
business.
Development Expenditure − In some businesses, long period of development and heavy amount of
investment are required before starting the production especially in a Tea or Rubber plantation. Usually,
these expenditure should be treated as the capital expenditure.
Wages − If paid to build up assets or for the erection and installation of Plant and Machinery.
Deferred Revenue Expenditure
Some non-recurring and special nature of expenditure for which heavy amount incurred and benefit for
the same will spread in up-coming years, to be treated as capital expenditure and will be shown as the
assets of the firm. Part of the expenditure should be debited to Profit & Loss account every year. For
example, if heavy amount paid for the advertisement of a product, which benefits are expected to be
received in next four years, then it should be debited as ¼ of the part in Profit & Loss account as the
revenue expenses and balance ¾ will be shown as the assets in the Balance-Sheet.
Capital and Revenue Profit
The premium received on issue of shares, and the profit on sale of fixed assets are the major examples
of capital profit and should not be treated as revenue profit. Capital profit should be transferred to the
capital reserve account, which is used to set off capital losses in future if any.
Capital and Revenue Receipts
Sale of fixed assets, capital employed or invested, and loans are the example of capital receipts. On the
other hand, sale of stock, commission received, and interest on investment received are the main
examples of revenue receipts. Revenue receipts will be credited to the profit and loss account and on
the other hand, capital receipts will affect the Balance-sheet.
Capital and Revenue Losses
Discount on issue of shares and losses on sale of fixed assets are the capital loss and would be set off
against the capital profits only. Revenue losses on normal business activity are part of the profit and loss
account.
What Does Management Accounting Mean?
What is the definition of management accounting? Management accountants (also called managerial
accountants) look at the events that happen in and around a business while considering the needs of the
business. From this, data and estimates emerge. Cost accounting is the process of translating these
estimates and data into knowledge that will ultimately be used to guide decision-making.
The main difference between financial and managerial accounting is whether there is an internal or
external focus. Financial accounting focuses on creating and evaluating financial statements that will be
reported externally, like creditors and investors. In contrast, managerial accounting analyses and results
are kept in-house for business leaders to use to drive decision-making and run the company more
effectively. Managerial accountants handle many facets of accounting. These include margins,
constraints, capital budgeting, trends and forecasting, valuation and product costing.
Let’s look at an example.
Example
Anderson is the CEO of a small consulting firm. He wants to hire a management accountant and a
financial accountant. He has come up with a list of job tasks and he needs to break them up into those
that should be performed by the managerial accountant and those that should be performed by the
financial accountant. Here is the list of tasks that Anderson has come up with:
Preparing cash flow statements
Income statement reporting
1. Budgeting
2. Calculating changes in stockholder equity
3. Preparing taxes for the organization
In this example, the only tasks that would be assigned to the management accountant are budgeting
and taxes. The financial accountant would handle the other tasks.
What is Tax Accounting?
Tax accounting refers to the rules used to generate tax assets and liabilities in the accounting records of
a business or individual. Tax accounting is derived from the Internal Revenue Code (IRC), rather than one
of the accounting frameworks, such as GAAP or IFRS. Tax accounting may result in the generation of a
taxable income figure that varies from the income figure reported on an entity's income statement. The
reason for the difference is that tax rules may accelerate or delay the recognition of certain expenses
that would normally be recognized in a reporting period. These differences are temporary, since the
assets will eventually be recovered and the liabilities settled, at which point the differences will be
terminated.
Temporary Differences
A difference that results in a taxable amount in a later period is called a taxable temporary difference,
while a difference that results in a deductible amount in a later period is called a deductible temporary
difference. Examples of temporary differences are:
Revenues or gains that are taxable either prior to or after they are recognized in the financial
statements. For example, an allowance for doubtful accounts may not be immediately tax deductible,
but instead must be deferred until specific receivables are declared bad debts.
Expenses or losses that are tax deductible either prior to or after they are recognized in the financial
statements. For example, some fixed assets are tax deductible at once, but can only be recognized
through long-term depreciation in the financial statements.
Assets whose tax basis is reduced by investment tax credits.
Basics of Tax Accounting
The essential tax accounting is derived from the need to recognize two items, which are as follows:
Current year. The recognition of a tax liability or tax asset, based on the estimated amount of income
taxes payable or refundable for the current year.
Future years. The recognition of a deferred tax liability or tax asset, based on the estimated effects in
future years of carryforwards and temporary differences.
Based on the preceding points, the general accounting for income taxes is as follows:
Create a tax liability for estimated taxes payable, and/or create a tax asset for tax refunds, that relate to
the current or prior years.
Create a deferred tax liability for estimated future taxes payable, and/or create a deferred tax asset for
estimated future tax refunds, that can be attributed to temporary differences and carryforwards.
Calculate the total income tax expense in the period.
Applicability of Tax Accounting
Every entity is required to engage in tax accounting. This includes individuals, corporations, sole
proprietorships, partnerships, and every variation on these entity concepts. Even nonprofit entities are
required to file annual informational returns, so that the IRS can determine whether these organizations
are complying with the rules for tax-exempt entities.
What is Forensic Accounting?
Forensic accounting is the investigation of fraud or financial manipulation by performing extremely

detailed research and analysis of financial information. Forensic accountants are often hired to prepare
for litigation related to insurance claims, insolvency, divorces, embezzlement, fraud, skimming, and any
type of financial theft.
Types of Forensic Accounting
There are various types of forensic auditing that can take place, and they are typically grouped by the
types of legal proceedings that they fall under. Below are some of the most common examples:
1. Financial theft (customers, 2.employees, or outsiders)
3.Securities fraud
4.Bankruptcy
5.Defaulting on debt
6.Economic damages (various types of lawsuits to recover damages)
7. M&A related lawsuits
8. Tax evasion or fraud
9.Corporate valuation disputes
10. Professional negligence claims
11. Money laundering
12. Privacy information
13.Divorce proceedings
What Is an Audit?
The term audit usually refers to a financial statement audit. A financial audit is an objective examination
and evaluation of the financial statements of an organization to make sure that the financial records are
a fair and accurate representation of the transactions they claim to represent. The audit can be
conducted internally by employees of the organization or externally by an outside Certified Public
Accountant (CPA) firm.
There are three main types of audits: external audits, internal audits, and Internal Revenue Service (IRS)
audits.
External audits are commonly performed by Certified Public Accounting (CPA) firms and result in an
auditor's opinion which is included in the audit report.
An unqualified, or clean, audit opinion means that the auditor has not identified any material
misstatement as a result of his or her review of the financial statements.
External audits can include a review of both financial statements and a company's internal controls.
Internal audits serve as a managerial tool to make improvements to processes and internal controls.
Audit
Understanding Audits
Almost all companies receive a yearly audit of their financial statements, such as the income statement,
balance sheet, and cash flow statement. Lenders often require the results of an external audit annually
as part of their debt covenants. For some companies, audits are a legal requirement due to the
compelling incentives to intentionally misstate financial information in an attempt to commit fraud. As a
result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an
evaluation of the effectiveness of their internal controls.
1 Standards for external audits performed in the United States, called the generally accepted auditing
standards (GAAS), are set out by Auditing Standards Board (ASB) of the American Institute of Certified
Public Accountants (AICPA).
2 Additional rules for the audits of publicly traded companies are made by the Public Company
Accounting Oversight Board (PCAOB), which was established as a result of SOX in 2002.
3 A separate set of international standards, called the International Standards on Auditing (ISA), were
set up by the International Auditing and Assurance Standards Board (IAASB).
Types of Audits
External Audits
Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the
state of a company's financials. Financial audits seek to identify if there are any material misstatements
in the financial statements. An unqualified, or clean, auditor's opinion provides financial statement users
with confidence that the financials are both accurate and complete. External audits, therefore, allow
stakeholders to make better, more informed decisions related to the company being audited.
External auditors follow a set of standards different from that of the company or organization hiring
them to do the work. The biggest difference between an internal and external audit is the concept of
independence of the external auditor. When audits are performed by third parties, the resulting
auditor's opinion expressed on items being audited (a company's financials, internal controls, or a
system) can be candid and honest without it affecting daily work relationships within the company.
Internal Audits
Internal auditors are employed by the company or organization for whom they are performing an audit,
and the resulting audit report is given directly to management and the board of directors. Consultant
auditors, while not employed internally, use the standards of the company they are auditing as opposed
to a separate set of standards. These types of auditors are used when an organization doesn’t have the
in-house resources to audit certain parts of their own operations.
The results of the internal audit are used to make managerial changes and improvements to internal
controls. The purpose of an internal audit is to ensure compliance with laws and regulations and to help
maintain accurate and timely financial reporting and data collection. It also provides a benefit to
management by identifying flaws in internal control or financial reporting prior to its review by external
auditors.
Internal Revenue Service (IRS) Audits
The Internal Revenue Service (IRS) also routinely performs audits to verify the accuracy of a taxpayer’s
return and specific transactions. When the IRS audits a person or company, it usually carries a negative
connotation and is seen as evidence of some type of wrongdoing by the taxpayer. However, being
selected for an audit is not necessarily indicative of any wrongdoing.
IRS audit selection is usually made by random statistical formulas that analyze a taxpayer's return and
compare it to similar returns. A taxpayer may also be selected for an audit if they have any dealings with
another person or company who was found to have tax errors on their audit.
There are three possible IRS audit outcomes available: no change to the tax return, a change that is
accepted by the taxpayer, or a change that the taxpayer disagrees with. If the change is accepted, the
taxpayer may owe additional taxes or penalties. If the taxpayer disagrees, there is a process to follow
that may include mediation or an appeal.
What is Public Accounting?
Public accounting refers to a business that provides accounting services to other firms. Public
accountants provide accounting expertise, auditing, and tax services to their clients. These services
usually fall into one of the classifications noted below.
Financial Statement Preparation
Personnel assist clients with the direct preparation of their financial statements. This can include the
handling of many accounting functions on an outsourced basis.
Financial Statement Auditing
This involves auditing the financial statements of clients. If a public accounting firm is hired to audit the
financial statements of a client, then independence rules restrict the ability of the firm to provide many
of the other services just noted. For example, a firm cannot prepare the financial statements of a client
and audit those statements.
Tax Return Preparation
Personnel prepare tax returns for clients.
Consulting
Engaging in a variety of consulting activities for clients that do not necessarily relate specifically to
accounting, such as the installation of large computer systems, advising on which controls to install,
providing litigation support, or reconstructed damaged accounting records.
Public Company Auditing
If a public accounting firm wants to engage in auditing activities for publicly held companies in the
United States, the firm must first register with the Public Company Accounting Oversight Board (PCAOB),
which imposes certain requirements and annual fees on these businesses. The result is that most
smaller public accounting firms find it uneconomical to engage in audits of publicly held companies.
Certified Public Accountants
Public accounting firms employ large numbers of certified public accountants (CPAs). The certification
was originally intended to designate a person as being qualified to conduct an audit. However, the
license also implies a high level of accounting expertise, and so is used to justify higher billing rates by
public accounting firms.
Public Accounting Specializations
The skill sets needed to provide certain services to clients are highly specialized. Consequently, public
accounting firms may be organized around a number of sub-specialties, each of which is staffed with
employees whose training and experience are highly focused. For example, public accounting firms may
market themselves as having particular expertise in areas as diverse as initial public offerings, fraud
investigations, health care auditing, and litigation support for insurance claims.
Job Titles Used in Public Accounting
The typical job titles used within a large public accounting firm (in ascending order) are as follows:
1. Staff
2. Senior
3. Manager
4. Senior Manager
5. Principal
6. Partner
7. Office Managing Partner
8. Regional Managing Partner
9. Managing Partner
Public accounting vs. private accounting.
If you’re considering a career in accounting, it’s important to understand the many different options that
are available to you. Anaccounting degree can lead you to many different types of accounting careers,
and unique specializations like tax and auditing.
Within the accounting profession, two of the most popular branches of accounting are known as public
accounting and private accounting (also known as industry accounting). At the most basic level public
and private accountants are external or internal accountants, respectively. There are other career paths
for accountants, but public and private accounting are two of the most popular branches of accounting.
If you’re considering a career in accounting or currently earning your accounting bachelor’s degree it’s
extremely important to understand your options, how to get involved in either public or private
accounting, and why a degree is vital to either path.
What is public accounting?
Public accounting can also be viewed as external accounting. Public accountants work at a third-party
firm and work with clients to review and prepare financial documents that are required to be disclosed
to the public. At the simplest level, public accountants work to verify financial documents, reports, and
disclosures from an outside perspective. They may help prepare tax returns for individuals and
organizations, perform audits for companies, consult, and advise on tax and financial matters. They may
be tax or audit specialists within their accounting firm. Public accountants work for a third-party firm
that is hired out by businesses and organizations to evaluate their finances.
What is private accounting?
Private accounting is commonly called industry accounting. Private accountants are considered internal
accountants. They work for a single company and help deal with the financial information of that
company. They prepare and analyze reports for an internal manager. Often their work is then analyzed
and reviewed by a public accounting firm. The public accounting firm will provide an independent stamp
of approval, confirming that the private internal accounting practices meet accounting standards.
Private accountants may file tax returns for their organization, perform audits of financial documents,
advise on financial and budgetary matters, and more all for their specific company.
What is a Financial Analyst?
A financial analyst is responsible for a variety of research tasks in order to inform investment strategy
and make investment decisions for their company or clients. This can include things like evaluating
financial data, examining current events and market developments, examining an organization’s
financial statements, and creating financial models to predict future performance. Depending on the
position, analysts can monitor macroeconomic trends or have a narrow focus on specific sectors and
industries. These roles are data-intensive and require strong mathematical and analytical skills. Given
the value of their role, financial analysts can be employed by large corporations such as investment
banks, insurance companies, mutual funds, hedge funds, pension funds, securities firms, investment
firms, private equity groups, venture capital firms, government agencies, and similar types of
organizations.
Government accounting refers to the process of recording and the management of all financial
transactions incurred by the government which includes its income and expenditures.
Various governmental accounting systems are used by various public...
What is the Statement of Comprehensive Income?
The statement of comprehensive income contains those revenue and expense items that have not yet
been realized. It accompanies an organization’s income statement, and is intended to present a more
complete picture of the financial results of a business. It is typically presented after the income
statement within the financial statements package, and sometimes on the same page as the income
statement.
A smaller business with relatively simple operations may not have engaged in any of the transactions
that normally appear on a statement of comprehensive income. If so, they do not need to produce the
statement.
Contents of the Statement of Comprehensive Income
The statement of comprehensive income begins with the net income figure drawn from the income
statement, to which adjustments are made for unrealized items, such as unrealized gains and losses
related to foreign currency translations and hedges. These various items are then totaled into a
comprehensive income total at the bottom of the report. A positive balance in this report will increase
shareholders’ equity, while a negative balance will reduce it; the change appears in the accumulated
other comprehensive income account.
Advantages of the Statement of Comprehensive Income
By adding this statement to the financial statement package, investors have a more detailed view of
revenue and expense items that will be realized in the future. This extra information can provide some
clues as to the financial results that a business will report at a later date, though only a portion of it.
Disadvantages of the Statement of Comprehensive Income
Though this statement has some predictive value, it makes no indication of the timing for when revenue
and expense items will be realized in the future. Also, this statement introduces complexity to the
financial reporting package that can be annoying for the accounting department producing it, and
provides information that some users have complained is excessively esoteric to be overly useful.
What is Accumulated Amortization?
Accumulated amortization is an aggregated value of the amortization expense that has been recorded
for an intangible asset based on the cost, lifetime, and usefulness that has been allocated to the asset in
producing the units, often viewed as the repayment that the firm would have to do to own the
underlying intangible asset.
Accumulated Amortization Formula
Accumulated Amortization is an aggregated value and hence can be expressed mathematically as:
Accumulated Amortization = ∑ Amortized Value of the Asset Each Year
Example of Accumulated Amortization
Accumulated amortization is used to realize the value of intangible assets
. Examples of these type of assets
are:
. Patents
. Exclusive contract
. Licensing agreement
An important point to note is that these values do diminish in value and eventually get to zero.
Consider the example of a patent. Let’s consider a major pharma firm ABC Healthcare headquartered in
New York, the US, which spends a good amount of money on its
Research and development
wing and comes up with a breakthrough drug that can help a deadly disease like cancer. This
breakthrough has resulted from years of research by its R & D department.
The firm files a patent for this drug and holds exclusive rights for the next ten years for 12 million
dollars. During these seven years, other firms and competitors are not allowed to produce this drug,
although they can develop a partnership with our firm but only at their discretion. However, the patent
will expire and should be realized in the financials.
Life of patent: 10 Years
Total Value: $ 12 million
Per Year Amortization
: 12/10 = $ 1.2 million
Considering ABC healthcare follows a straight-line amortization
mechanism, let’s design the cash flow for this expense.

Accounting for you learning, [19-Aug-22 12:06 PM]
this expense will continue to be part of the balance sheet
till 2029 post, which is completely amortized.
Refer to the given above excel sheet for detailed calculation.
Important Points to Note About Accumulated Amortization
Often accumulated amortization is confused with depreciation. However, that’s not the case, as the
basic fundamental difference between the two is that amortization is used for intangible assets
, while depreciation is used for tangible assets. Although the two are quite similar in how they are being
accumulated and calculated.
Amortization calculations directly affect the firm’s financial statements, especially the bottom line
. Hence, the investors keenly watch it to evaluate the firm’s financial health.
As per current accounting principles
guidelines, a firm must evaluate its intangible assets at their current valuation at least once a year and
record them as accumulated amortization. Advised by GAAP (Generally accepted accounting principles
), it is one of the ways through which the company adjusts its intangible assets to the fair value on the
balance sheet as per the current market value.
Accumulated amortization is similar to depreciation, with the only difference arising from what assets
have been applied. These accounting methods
want to discount the value of assets that they possess in the company’s financial statements steadily
and regularly, keeping the minimum effect on the short-term and long-term profits. On the one hand,
depreciation is a mechanism to realize these values for tangible assets, accumulated amortization, on
the other hand, is a mechanism to realize these values for intangible assets like licensing agreements,
patents owned by the firm, list of customers to name a few.
Accumulated amortization affects the net income as it reduces the retained earnings
acquired. To illustrate, a 50 million $ amortized value will reduce the revalue of retained earnings by the
same amount.
Amortization draws many parallels from depreciation. There can be three different methods through
which amortization can be calculated. One of those is how these can be calculated and recorded on the
financial statements
. Irrespective of the methods used, it is imperative to understand the usefulness of the intangible asset,
its residual value, and its impact on actual production and distribution costs
. Straight-line Method: Similar to the straight-line method of depreciation it calculates the total
amortization cost and divides it by the time horizon. Thus, providing a gradual and even decay of the
intangible asset.
Accelerated Method: This method follows a weighted average approach and provides more value in
earlier years and reduces with each passing year. It is based on the economic principle of the law of
diminishing marginal utility, as with each year, gains realized are less than what was achieved last year.
Units of Production Method – This method allocates the cost in the ratio in which this intangible asset
helped produce the actual units.
.Often accumulated amortization is presented as a separate item on the balance sheet
as a common industry practice. Another way of looking at it can be realizing it as a contra asset account.
Conclusion
Accumulated amortization is a useful mechanism to evaluate the value of intangible assets and their
usefulness to the firm. However, the point to note is that not all intangible assets can be amortized.
Consider the case of patents and licensing agreements. These methods help evaluate the competitive
edge that a firm gains compared to its peers and how it can use it to present its financials in a better way
to its shareholders.
Research and Development Definition
Research and Development is an actual pre-planned investigation with the expectation of gaining new
scientific or technical knowledge that can convert into a scheme or formulation for
manufacturing/supply/trading etc. resulting in a business advantage.
R&D’s cost is debited in the income statement
as an expense/capitalized in the relevant assets (depending upon the nature of R&D) of that period they
incurred. Its cost, once written off, can’t be reinstated. Many countries have specific guidelines and
accounting standards for implementing research and development.
Types of R&D (Research and Development)
There are three types of R&D.
#1 – Basic Research
Basic research is a theoretical approach to any subject. This objective aims to get complete knowledge
and understanding of one special subject, not a practical situation. This research is also called pure or
fundamental research.
#2 – Applied Research
This objective aims to get complete knowledge and understanding of one special subject in a practical
situation. This research is an inverse of basic research. This research is formulated to solve a practical
problem.
#3 – Development Research
This Research is a combination of applied and basic research. This research will be implemented after
getting knowledge and understanding of a specific task/subject from the basic and applied research.
*Advantage*
1.R&D has increased the productivity of goods and services manufactured/traded/supplied by an entity.
2.It has increased the income or profitability
of an entity after analysis of costs such as manufacturing/selling/general expenses, which expenses can
be reduced to a certain level so that income or profitability can be increased.
3.Governments of some countries motivate industries/entities for Research and development of their
goods and supplies and provide taxes benefits.
4.Positive Research and development (R&D) increases the goodwill of an entity’s product and services.
6. Gained new knowledge and understanding from research and development, an entity can start a new
business plan and find opportunities.
7.The company can increase the business volumes in the market after researching the present market
scenario basis. It will increase the revenue and profitability of the company.
8. What are the customers expecting from the goods and services provided by the company?
The company wants to borrow money before providing documents to the lender. In that case,
management should analyze the lender’s profile, future forecasting about changes in the rate of interest
, which country’s economy is impacting the lender’s business, etc., and after gaining all the relevant
knowledge and understanding.
9.Positive R&D outcomes can increase the long-term benefits of investments in the entity.
An entity can use available human resources at an optimum level.
10. It can control the risk such as Operational Risk Management Risk, Financial risk and investing risk
after analyzing the relevant vertical scenario.
*Disadvantage
1.Research and development have increased the cost of the company. Its outcomes can be positive and
negative.
2.Separate Manpower to be hired by the entity for doing R&D and this will increase the cost of the
company.
3.It is a very difficult process, and highly experienced and well–qualified human resources are required
to do the research and development (R&D).
It can produce artificial outcomes.
4.Failure in R&D will not be increased in sales volume and revenue as well.
5.Whether an Entity gets positive or negative outcomes, Product costs are increased by the R&D cost,
and increases in product prices can be decreased in sales volume.
*Limitation of Research and Development*
1.Outcomes/findings/results of research and development can be positive or negative and artificial.
2. Selection of the type of R&D is very difficult until human resources can’t understand the current
market scenario.
3.Company cost will be incurred
on all type of R&D whether its outcomes are positive or negative.
4.The risk involved in these projects and the company should have a sufficient budget to expose the risk
and timelines set by the team.
5.Sometimes research and development can be terminated in the middle because of changes in the
political scenario, new market competitors, or declined prices.
*Important Points about R&D*
1.The objective is to obtain new scientific and technical knowledge and understanding.
2.The entity should have a plan, budget, stipulated time and human resource to complete the research
and development on time.
3. If Entity gets positive outcomes, it should patent it to achieve future economic benefits.
4.The entity should hire highly experienced and well–qualified manpower to fulfill the requirement and
get positive outcomes.
5.An entity should purchase the latest machinery technology for doing research and development.
6.It requires a sufficient upfront budget to do the research and development.
7.Negative outcomes can decrease the market’s goodwill/brand image/reputation.

8.The market is very volatile, and some human resources should be used to know the updated changes
in the market so that entities can change the quality of the product, costing, and design as per updated
changes.
9.An entity should fix its product prices after verifying the market price and quality of a similar product;
otherwise, the company will lose sales volume, revenue, and profitability.
A capital market can be either a primary market or a secondary market. In a primary market, new stock
or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities
seeking to raise long-term funds on the primary capital markets are governments (which may be
municipal, local or national) and business enterprises (companies). Governments issue only bonds,
whereas companies often issue both equity and bonds. The main entities purchasing the bonds or stock
include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and
investment banks trading on their own behalf. In the secondary market, existing securities are sold and
bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere. The
existence of secondary markets increases the willingness of investors in primary markets, as they know
they are likely to be able to swiftly cash out their investments if the need arises.[
A second important division falls between the stock markets (for equity securities, also known as shares,
where investors acquire ownership of companies) and the bond markets (where investors become
creditors).
What is Quantitative Research?
Quantitative Research refers to the systematic investigation in the case in which a person doing the
researcher collects the data from the different respondents that are based on numerical figures and
data obtained is then analyzed for obtaining the results using different mathematical, statistical and
computational tools.
In its purpose, it is conclusive as it quantifies the problem under consideration and provides statistical
results to measure its impact.
Top 4 Methods / Types of Quantitative Research
#1 – Survey Research
Using survey research as the method of research, an organization conducting a survey asks different
survey questions from the respondents using the various types like online surveys, online polls, paper
questionnaires, etc. and then collects data and analyzes collected data in order to produce the
numerical results.
#2 – Causal-Comparative Research The Causal-Comparative Research method is used to draw

conclusions with respect to the cause and effect equation between the two or more than two variables,
where the one variable will be dependent on other variables, which will be independent.
#3 – Experimental Research
This analysis is done for the purpose of proving or for disproving the statement. It is generally used in
the field of natural sciences or in the field of social sciences as in those areas; various statements are
there which required to be proved as right or wrong
#4 – Correlation Research
Correlation Research was conducted for establishing a relationship between the two closely associated
entities to know the impact of one on the other and the changes which were eventually observed. It is
carried for giving value to the naturally occurring relationships. For this research minimum, two different
groups will be required.
Example An example could involve the survey conducted by the hospital of a town, where the hospital
wants to know how satisfied their patients are with respect to the treatment taken and their health
after that treatment.
The sample of the survey includes all those persons who have availed the treatment of the hospital
within the last few days. Quantitative research can help the hospital to explore the variety of problems,
and the questions which the patients coming to them are facing.
A clear understanding of the issues identified can help the hospital and the other professionals involved
in the health care to tailor their services to match according to the needs of the individuals and, along
with that, develop a concordant relationship.
Using the survey, a hospital can collect the quantitative data and the metrics on the goodwill
of the hospital in the customer’s mind on the basis of the multiple parameters like service quality,
pricing, the experience of the customer, etc.
This data can be taken by asking the different questions which provide the data in the form of the
numbers which can be analyzed by the researcher and worked upon.
Advantages
1. The data in the Quantitative research is collected and presented in the numbers, so the result
obtained from it will be reliable as the numbers state the truth and do not lie.
2. Wherever the situation of the conflicts arises, the researchers prefer quantitative research as it gives
an honest picture of the research conducted without any discrepancies and is thus extremely accurate.
3.It involves the statistics; it provides a wider scope of the data collection for the researchers.
3. Quantitative research is not based on the thinking or the perception of the individual or group of
individuals conducting the research rather;, it is based on the numbers; thus, it removes the risk of
personal biases being shown in the result of the research.
4. The data collected in the Quantitative research is less time consuming as the research is conducted on
a group of respondents that represent a population and there is the involvement of the statistics for
conducting and presenting results, so it is quite straightforward, thus less time-consuming.
Limitations/Disadvantages
The different Limitations and drawbacks of Quantitative research include the following:
1. The Survey instruments used for the research are vulnerable to errors like the mistakes in
measurement or the flawed sampling techniques as the numerical data is involved. If the error occurs
when the research will not give the correct results for which the research is conducted.
2. Generally, the Quantitative research method requires extensive statistical analysis that becomes
difficult to perform, especially if the person conducting the research is from a non – statistical
background.
3. In this method, a structured questionnaire is involved, which has close-ended questions. Due to this,
limited outcomes can only be derived from the research, and thus the results cannot always represent
actual occurrences. Also, the respondents of the research have limited options for their responses as
their responses will be based on the selection of the question and their options as made by the
researcher.
Important points to note
1. In Quantitative research, data is collected and presented in the numbers, and the various statistical
tools are used to obtain the results from the research.
2. The different factors which are related to the research topic should be studied before collecting the
feedback from the respondents.
Conclusion
Quantitative Research is the systematic investigation where the data is collected from the respondents
which are based on the numerical figures and the various statistical, mathematical and computational
tools are used in order to get the results from the research.
After understanding the numbers obtained from the research carefully, the researcher predicts the
future of the product or the service for which the research is conducted and then makes the changes
accordingly. The results that are achieved from the quantitative research method are statistical, logical,
and unbiased.
What are Loan Loss Provisions?
Loan loss provisions are the portion of the loan repayments set aside by banks to cover the portions of
the loss on defaulted loan payments. It helps the bank balance the income and survive during bad times
and is recorded in the income statement as a non-cash expense.
How does it Work?
Lending and borrowing are the main businesses of the banking industry. They borrow money from
customers, called deposits, and lend these to needy people. Interest out of these lending is the main
source of revenue for the banks. According to the conservatism principle for a business, all losses
should be accounted for, whether it is materialized or not. So the banks anticipate loan default
payments and provide a portion of loan repayments to balance the loss of default payments.
How does it Work?
Lending and borrowing are the main businesses of the banking industry. They borrow money from
customers, called deposits, and lend these to needy people. Interest out of these lending is the main
source of revenue for the banks. According to the conservatism principle for a business, all losses
should be accounted for, whether it is materialized or not. So the banks anticipate loan default
payments and provide a portion of loan repayments to balance the loss of default payments.
Loan Loss Provisions
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How to Calculate?
Many factors affect the calculation of loan loss provisions. The provision needs to be adjusted frequently
as per the available estimates and calculations on customer loan repayment reports.
Historical Data on Repayments and Default: The bank has to refer to and collect the record of
customers’ defaults and repayments of loans.
Loan Collection Expenses: Loan collection expenses affect the calculation of provisions.
Credit Losses: The credit loss for late payments.
Economic Conditions: The prevailing economic recession affects the calculations.
Business Cycle: The movement of GDP is also a factor.
Interest Rate: The change in interest rate influence its calculation.
Tax Policy: The changes in the tax rate.
The Loan Loss Provisions Example
Loan unpaid more than 2 months=100000, provision 10%
Loan unpaid between 2and 6 months =250000, provision 12%
If, Loan unpaid more than 6 months =400000, provision 15%

Loan Loss Provision Example 1-1
This Ratio is a ratio that indicates the capacity of the bank to bear the loss on loans. A higher rate means
a greater ability for the banks to face loan losses.
Loan Loss Provision Coverage Ratio = Pre-Tax Income + Loan Loss Provision / Net Charge Offs
Net charges = Actual Losses
Suppose a bank provides Rs. 1,000,000 loan to a construction company to purchase machinery. After
one year, due to the recession in the economy, the company is not able to make full repayment of the
loan. The bank expects 70% of the repayment, and it records a provision of Rs.300,000.
But the bank can collect only Rs.500,000 from the company, and the net charge off is Rs.500,000.
Suppose the bank’s recorded pre-tax income
is Rs.2,000,000
Loan Loss Provision Example 1
=2,000,000 + 300,000 / 500,000
= 4.6
Loan Loss Reserves vs. Loan Loss Provisions
At the time of the loan issue, the bank estimates a loan loss reserve to cover the default, which is shown
in the asset side of the balance sheet
deducted from total loans. It is a contra asset, which reduces the amount of loan that needs to be paid
back. If the bank thinks it needs to raise the reserve due to some factors, the bank charges an amount
from its current earnings to increase the loan loss reserve. It is the loan loss provisions.
Loan loss reserve is shown on the asset side of the balance sheet as a contra asset account
, deducted from the loan. Whereas, Loan loss provision is recorded as a non-cash expense in the income
statement
Loan Loss provision is an adjustment to loan loss reserve.
The loan loss reserve is an appropriation of profit. Loan loss provision is a charge against profit.
The loan loss reserve is created at the time of providing a loan. Whereas, Loan loss provision is charged
if there is a need for an increased reserve.
Loan loss reserve refers to withholding the amount. The loan loss provision is the amount set aside to
meet the default loan payments
Impact
These are expected losses of the bank due to credit risk charged against the profits, recorded as an
expense in the income statement. It affects the regulatory capital of the bank through a profit and loss
account
Meaning of Financial Modeling
Financial modeling is the process conducted to create a financial representation of the entity. Through
this financial model, the financial analyst tries to forecast the future earnings and performance of the
company. Analysts use numerous forecast theories and valuations to recreate business operations. The
financial model, once completed, displays a mathematical depiction of the business events. The primary
tool utilized to create the financial model is the excel spreadsheet.
What Is an Adjusting Journal Entry?
An adjusting journal entry is an entry in a company's general ledger that occurs at the end of an
accounting period to record any unrecognized income or expenses for the period. When a transaction is
started in one accounting period and ended in a later period, an adjusting journal entry is required to
properly account for the transaction.
Adjusting journal entries can also refer to financial reporting that corrects a mistake made previously in
the accounting period.
An adjusting journal entry involves an income statement account (revenue or expense) along with a
balance sheet account (asset or liability). It typically relates to the balance sheet accounts for
accumulated depreciation, allowance for doubtful accounts, accrued expenses, accrued income, prepaid
expenses, deferred revenue, and unearned revenue.
Types of Adjusting Journal Entries
In summary, adjusting journal entries are most commonly accruals, deferrals, and estimates.
Accruals
Accruals are revenues and expenses that have not been received or paid, respectively, and have not yet
been recorded through a standard accounting transaction. For instance, an accrued expense may be
rent that is paid at the end of the month, even though a firm is able to occupy the space at the
beginning of the month that has not yet been paid.
Deferrals
Deferrals refer to revenues and expenses that have been received or paid in advance, respectively, and
have been recorded, but have not yet been earned or used. Unearned revenue, for instance, accounts
for money received for goods not yet delivered.
Estimates
Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for
doubtful accounts, or the inventory obsolescence reserve.
What is Management Accounting?
Management accounting is a method of delivering financial information and resources to manager in

making decisions. The sole difference between management accounting and financial accounting is that
the organisation's internal staff exclusively utilises management accounting. In this procedure, the
finance administration shares financial information and reports with the company's management team,
such as invoices and financial balance statements.
Management accounting examples, also known as cost accounting, is the process of assessing a
company's expenses and activities to generate internal financial reports, records, and accounts to assist
managers in reaching their objectives. In other words, it is the process of deciphering financial and
costing data and converting it into information that management and officials inside a company can use.
According to the Corporate Finance Institute, managerial accounting is the act of "identifying,
measuring, analysing and interpreting accounting information" that assists corporate executives in
making smart financial choices and efficiently managing their daily operations. Unlike other accounting
disciplines, this one is primarily concerned with internal data collection and reporting, which means that
experts seldom engage with or advise external customers
What is financial management?
Financial management is strategic planning, organising, directing, and controlling of financial

undertakings in an organisation or an institute. It also includes applying management principles to the
financial assets of an organisation, while also playing an important part in fiscal management.
The objectives involved in financial management include:
1. Maintaining enough supply of funds for the organisation;
2. Ensuring shareholders get good returns on their investment;
3. Optimum and efficient utilisation of funds;
4. Creating real and safe investment opportunities.
Accounting for you learning, [24-Nov-22 10:50 PM]
The role of the financial manager
The financial management department of any company is handled by a financial manager.
This department has numerous functions, such as:

1. Calculating the capital required :
The financial manager has to calculate the amount of capital an organisation requires. This depends on
the policies of the company with regards to expected expenses and profits. The amount required has to
be estimated in such a way that the earnings in the company increase.
2.Formation of capital structure:
Once the amount of capital has been estimated, a capital structure needs to be formed. This involves a
debt-equity analysis, both short-term and long-term. The outlook of the structure depends on the
amount of capital the company owns, and the amount that needs to be raised via external sources.
3. Investing the capital:
Every organisation or company needs to invest money in order to raise more capital and gain regular
returns. This means the financial manager needs to invest funds in safe and profitable ventures.
4. Allocation of profits:
Once the organisation has a solid net profit, it is the financial manager’s duty to efficiently allocate it.
This could involve keeping a part of the net profit for contingency, innovation, or expansion purposes,
while another part of the profit can be used to provide dividends to the shareholders.
5.Effective management of money:
The financial manager is also responsible for effectively managing the company’s money. Money is
required for various purposes in the company such as payment of salaries and bills, maintaining stock,
meeting liabilities, and the purchase of any materials and/or equipment.
6. Financial control:
Not only does the financial manager have to plan, organise, and obtain funds, but he/she also has to
control and analyse the company’s finances. This can be done using tools such as financial forecasting,
ratio analysis, risk management, and profit and cost control.
Why is financial management important?
This form of management is important for various reasons.
1. Helps organisations in financial planning and acquisition of funds;
2. Aids organisations to effectively utilise and allocate the funds received or acquired;
3. Supports organisations in making critical financial decisions;
4. Helps in improving the profitability of organisations;
5. Increases the overall value of organisations;

6. Provides economic stability.
What is the Petty Cash Book?
The petty cash book is a recordation of petty cash expenditures, sorted by date. In most cases, the petty
cash book is an actual ledger book, rather than a computer record. Thus, the book is part of a manual
record-keeping system. The petty cash book has declined in importance, as companies are gradually
eliminating all use of petty cash, in favor of using company credit cards.
Accounting for Petty Cash
There are two primary types of entries in the petty cash book, which are a debit to record cash received
by the petty cash clerk (usually in a single block of cash at infrequent intervals), and a large number of
credits to reflect cash withdrawals from the petty cash fund. These credits can be for such transactions
as payments for meals, flowers, office supplies, stamps, and so forth.
A somewhat more useful format is to record all debits and credits in a single column, with a running
cash balance in the column furthest to the right, as shown in the following example. This format is an
excellent way to monitor the current amount of petty cash remaining on hand.
Sample Petty Cash Book (Running Balance)
Yet another variation on the petty cash book is to maintain it as a spreadsheet, where each item is
recorded in a specific column that is designated for a particular type of receipt or expense. This format
makes it easier to record petty cash activity in the general ledger. An example of this format, using the
same information as the preceding example, is as follows:
Sample Petty Cash Book (Columnar)
when the amount of petty cash on hand declines to near zero, as is caused by withdrawals for various
expenditures, the petty cash clerk then obtains additional cash from the cashier, and records this cash
influx as a new debit. the petty cash clerk also turns in a copy of his or her petty cash book to the general
ledger accountant or cashier, who creates a journal entry to record how the cash in the petty cash
drawer was used.
Advantages of a petty cash
book
the petty cash book is a useful control over petty cash expenditures, since it forces the petty cash clerk
to formally record all cash inflows and cash outflows. to ensure that this is an effective control, the petty
cash book should be reviewed periodically by an internal auditor to see if the net total amount of cash
available as per the book matches the actual amount of cash on hand in the petty cash drawer. if not,
the petty cash clerk may require additional training.
What is Bookkeeping
Bookkeeping is a process of recording and organizing all the business transactions that have occurred in
the course of the business. Bookkeeping is an integral part of accounting and largely focuses on
recording day-to-day financial transaction of the business.
All the financial transactions such as sales earned revenue, payment of taxes, earned interest, payroll
and other operational expenses, loans investments etc. are recorded in books of accounts.
The way the bookkeeping is managed determines the accuracy of the overall accounting process that is
been followed by the business. Thus, bookkeeping ensures that the record of financial transactions are
up-to-date and more importantly, accurate
Why Bookkeeping is important for all business?
Just like to prepare a report, you need a source of data, bookkeeping is a source that gets summarized
into the financial statements or any other accounting report that you see. With bookkeeping tracks and
records all the financial transactions, it becomes the starting point of accounting. No bookkeeping = No
accounting.
Thus, it becomes important for businesses, small or big to have bookkeeping in place.
The following are the importance of bookkeeping:
1. Bookkeeping helps to keep track of receipts, payments. Sales, purchases and record of every other
transaction made from the business.
2.It helps to summarize the income, expenditure and other ledger records periodically.
3.It provides information to create financial reports which tells us specific information about the
business as how much profits the business has made or how much the business is worth at a specific
point of time.
Tasks and examples of the Bookkeeping system
With the definition of bookkeeping, it’s clear that the bookkeeping task involves all that is required to
track, record and organize all the financial transaction that has occurred in the business.
The person is responsible for managing bookkeeping usually entrusted with the responsibility of tracking
all the transaction related to business.
The following are the bookkeeping tasks examples:
1. Billing for goods sold or services provided to clients.
2.Recording receipts from customers.

3.Verifying and recording invoices from suppliers.
4.Recording payment made to suppliers and so on…
types of bookkeeping
business entities choose from two types of bookkeeping systems, although some entities use a
combination of both.
1.the single-entry system of bookkeeping requires recording one entry for each financial activity or
transaction. the single-entry bookkeeping system is a basic system that a company might use to record
daily receipts or generate a daily or weekly report of cash flow.
2.the double-entry system of bookkeeping requires a double entry for each financial transaction. the
double entry system provides checks and balances by recording corresponding credit entry for each
debit entry. the double-entry system of bookkeeping is not cash-based. transactions are entered when a
debt is incurred or revenue is earned.
Principles of Bookkeeping
To ensure the all the transactions are recorded and organized systematically, bookkeeping principles are
applied. The following are the bookkeeping principle
1. Revenue principle
2. Expense principle
3. Matching principle
4. Cost principle
5. Objectivity principle
Payroll is the process of paying a company's employees, which includes tracking hours worked,
calculating employees' pay, and distributing payments via direct deposit to employee bank accounts or
by check. However, companies must also perform accounting functions to record payroll, taxes
withheld, bonuses, overtime pay, sick time, and vacation pay. Companies must put aside and record the
amount to be paid to the government for Medicare, Social Security, and unemployment taxes.
What is a Suspense Account?
A suspense account is an account used to temporarily store transactions for which there is uncertainty
about where they should be recorded. Once the accounting staff investigates and clarifies the purpose
of this type of transaction, it shifts the transaction out of the suspense account and into the correct
account(s). An entry into a suspense account may be a debit or a credit.
It is useful to have a suspense account, rather than not recording transactions at all until there is
sufficient information available to create an entry to the correct account(s). Otherwise, larger
unreported transactions may not be recorded by the end of a reporting period, resulting in inaccurate
financial results.
Example of a Suspense Account
A customer sends in a payment for $1,000 but does not specify which open invoices it intends to pay.
Until the accounting staff can ascertain which invoices to charge, it temporarily parks the $1,000 in the
suspense account. In this case, the initial entry to place the funds in the suspense account is:
The accounting staff contacts the customer, identifies which invoices are to be paid with the $1,000, and
shifts the funds out of the suspense account with this entry:
As another example, a supplier delivers an invoice for $2,500 of services, which is payable in 30 days.
The accounting staff is uncertain which department will be charged with the invoice, so the accounting
staff records the following initial invoice, while the department managers argue over who is responsible
for payment:
The initial entry records the invoice in the accounts payable system in a timely manner, so that the
company can pay it in 30 days. The department managers eventually decide that the office supplies
account of the sales department should be charged with the expense, so the accounting staff records
the following entry:
Suspense Account Best Practices
Regularly review the items in a suspense account, with the objective of shifting transactions into their
appropriate accounts as soon as possible. Otherwise, the amounts in the account can grow to quite
substantial proportions, and be very difficult to deal with months later, especially if there is minimal
documentation of why transactions were initially placed in the account. Accordingly, there should be a
daily measurement of the balance in the suspense account, which the controller uses as the trigger for
ongoing investigations. Further, it is useful to track which transactions are repeatedly shunted into the
suspense account, so that systems can be enhanced to make it easier to properly identify these items in
the future, thereby keeping them out of the account.
All suspense account items should be eliminated by the end of the fiscal year. Otherwise, a company is
issuing financial statements that contain unidentified transactions, and which are therefore incorrect.
Classification of Suspense Accounts:
The suspense account is classified as a current asset, since it is most commonly used to store payments
related to accounts receivable. It is possible to also have a liability suspense account, to contain
accounts payable whose disposition is still being decided. If so, the liability suspense account is classified
as a current liability.
What is Depreciation?
Depreciation is a planned, gradual reduction in the recorded value of an asset over its useful life by
charging it to expense. Depreciation is applied to fixed assets, which generally experience a loss in their
utility over multiple years. The use of depreciation is intended to spread expense recognition over the
period of time when a business expects to earn revenue from the use of an asset.
For example, an organization buys a truck for $50,000 and expects to use it for the next five years.
Accordingly, the firm charges $10,000 to depreciation expense in each of those five years. This charging
to expense in a consistent, even amount over time is called the straight-line method. If the firm had
instead elected to recognize a larger expense earlier in the life of the truck, it would use an accelerated
depreciation method, which reduces the amount of reported income early in the life of an asset. Yet
another variation is to depreciate based on the actual usage of an asset, which is addressed by the units
of production method.
Ratio Analysis: Meaning
Ratio analysis is a technique for evaluating financial statements or, to say, for detailed analysis of the
financial statements presented by the firm. The analysis or evaluation is done to form an opinion about
the various aspects of the organization, like profitability, short and long-term liquidity, efficiency,
potential, etc. Moreover, this analysis is done and utilized by both internal and external stakeholders.
Internal stakeholders primarily include managers. External stakeholders include creditors, investors,
lenders, etc.
Ratio analysis is the most commonly used technique among all the methods of analyzing a financial
statement. And it enhances the usability of financial statements.
Explanation with Example
The profit and loss statement states the profit or loss of the company in a particular year. In ratio
analysis, various profitability ratios are calculated, like gross, net, or operating margins. Often
comparison with peers help us know where we stand. A point to note is that absolute figures of the P/L
statement are not comparable. But the calculation of the margin by way of ratio analysis makes it
possible to compare the status or trend of margin with past years as well as with the competitors. This
helps us judge the overall efficiency of the business and its management.
Let us look at various other pointers where financial analysis is important.
Importance of Ratio Analysis: Ratio analysis is a very important tool widely utilized by existing
shareholders, prospective investors, suppliers, lenders, competitors, customers (at times), equity
research analysts, government agencies for evaluating tenders, etc. The following are the main reasons
for such wide usage.
1. Provide abstract of operational efficiency.
2.Reflects the profitability of the company.
3. Helps in forming opinions and making further decisions.
4. Helps in inter and intra-company comparisons.
Applications of Ratio Analysis:
There are various applications of ratio analysis depending on the purpose and need of the analyst.
Following are some of the major applications of ratio analysis.
1. Assess the liquidity position.
2. Helps in determining optimal capital structure.
3. Depicting the efficiency of the company.
4.Determining long-term solvency.
Types of Ratios:
Ratios are classified into the following types:
1. Profitability Ratios:
Profitability ratios help analyze returns a business is generating from its business operations and
investments. Not only this, but it also analyzes the kind of margins that the business can generate from
its turnover/revenue. Profitability ratios are useful to most stakeholders. Because every commercial
organization wants to earn profits and improve its profitability consistently.
There are 2 types of ratios under profitability ratios:
1. Margin ratios:
these ratios include gross profit margin, net profit margin, expense ratios, etc.
2.Return ratios:
The return ratios include return on equity, return on assets, earning power, return on capital employed,
etc.
2. Activity/Efficiency/Turnover Ratios:
Turnover ratios, also known as asset management ratios, efficiency ratios, or activity ratios, judge the
efficiency in the management of assets of the business. Management invests in assets to generate sales.
And these ratios determine if the utilization of these assets is efficient. Moreover, how does that
compare with other similar entities as also within the industry segment? Or how efficiently the capital in
the business rotates.
Important activity/ efficiency/turnover ratios are:
1. Inventory turnover ratio
2. Receivables turnover ratio
3. Fixed assets turnover ratio
4. Total asset turnover ratio
5. Payables turnover ratio
6. Working capital turnover ratio
3. Liquidity Ratios:
These ratios are calculated to find out the liquidity position of an organization in the short term.
Liquidity means the ability to make payments as and when some obligations turn due. It is the lifeblood
of any business organization because lacking it can lead to bankruptcy, interruption in the
manufacturing cycle, and so on.
The important liquidity ratios are:
1. Current ratio
2. Acid-test ratio
3. Quick ratio, etc
4.Solvency/Leverage Ratios:
Leverage in finance means the use of debt in its capital structure. Leverage ratios help in determining
the debt portion in the capital structure of a business. Along with this, these ratios also assess the risk of
bankruptcy or repayment capacity for the organization. These ratios are also known as solvency ratios. It
involves:
1. Debt-equity ratio
2. Debt-asset ratio, etc.
5. Coverage Ratios:
Coverage ratios judge the debt servicing capacity of a business by comparing its debt obligations with
resources used for honoring them. These include:
1. Interest coverage ratios

2. Fixed charge coverage ratios
3. Debt service coverage ratios, etc.
6. Valuation/Market Value Ratios:
Valuation ratios or market value ratios mainly help to analyze the worth of stock in the share market or
the value of a company as a whole. Valuation ratios include:
1. Price-to-earnings ratio
2. Dividend yield
3. Market value to book value, etc.
Limitations of Ratio Analysis:
Amongst various uses, advantages, and applications of ratios, these have certain limitations too. These
includes:
1. Non-consideration of the inflationary effect.
2. Variation in the industry to industry standards.
3. The difference in accounting practices.
Conclusion:
Stakeholders cannot rely on financial statements alone to take any decision relating to their stakes in the
organization. Ratio analysis is a very useful method to analyze financial statements that help
stakeholders in making well-informed decisions.
A bank reconciliation statement is a document prepared by a company that shows its recorded bank
account balance matches the balance the bank lists. This statement includes all transactions, such as
deposits and withdrawals, from a given timeframe.
Many companies produce bank reconciliation statements regularly to ensure they’ve recorded all their
banking transactions properly and that their ending balance matches the amount the bank says they
have.
Effect of Time Intervals On Bank Reconciliation Statements
A bank reconciliation statement is prepared at the end of the month. The entries in the statement stop
being the cause of discrepancies after a few days.
For example, if a businessman issues a check for $2,500 to a supplier on 28 May, it is quite possible that
the check may not be presented by the supplier to his bank until, say, 5 June.
The bank statement submitted by the businessman at the end of May will not contain an entry for the
check, whereas the cash book will have the entry. As a result, a difference of $2,500 is caused between
the two balances.
Nevertheless, on 5 June, when the bank pays the check, the difference will cease to exist.
Similarly, if a businessman deposits any checks on the last day of the month, these cheques may be
collected by his bank and shown on his bank statement three or four days later.
While this will cause a discrepancy in balances at the end of the month, the difference will automatically
correct itself once the bank collects the checks.
Hence, at the end of each month, the first thing to do is to consult the bank reconciliation statement
prepared at the end of the previous month. The items therein should be compared to the new bank
statement to check if these have since been cleared.
If so, these entries will not appear in the bank reconciliation statement prepared at the end of the
current month.
This is an important fact because it brings out the status of the bank reconciliation statement. A bank
reconciliation statement is only a statement prepared to stay abreast with the bank statement; it is not
in itself an accounting record, nor is it part of the double entry system.
Example The following is the bank column of a cash book prepared by Sara Loren for May 2017:
A careful comparison of the above two documents indicates the following:
(a) Deposits made by Sara Loren on 30 May, $1,810, and on 31 May, $2,220, have not been credited to
the bank statement.
(b) Checks Nos. 789 and 791 for $5,890 and $920, respectively, do not appear on the bank statement,
meaning these had not been presented for payment to the bank by 31 May.
(c) A deposit of $5,000 received by the bank (and entered in the bank statement) on 28 May does not
appear in the cash book. This must be a direct deposit received by the bank.
(d) Check deposited on 14 May ($2,540) was returned unpaid on 17 May. The cash book does not
contain a record of dishonor.
(e) Standing order payment of $1,500 (for rent) also fails to appear in the cash book.
(f) The cash book does not contain a record of bank charges, $70, raised on 31 May.
Evidently, the cash book should be updated by recording items (c) to (f) listed above. The completed
cash book should then be balanced. After doing this, it would appear as follows:
The Dr. balance shown in the completed cash book is $7,090, while the bank statement shows a Cr.
balance of $9,870. A bank reconciliation statement must, therefore, be prepared as follows:
What is a Trial Balance?
A trial balance is a report that lists the balances of all general ledger accounts of a company at a certain
point in time. The accounts reflected on a trial balance are related to all major accounting items,
including assets, liabilities, equity, revenues, expenses, gains, and losses. It is primarily used to identify
the balance of debits and credits entries from the transactions recorded in the general ledger at a
certain point in time.
Example:
Prepare a Trial Balance for Shining Brothers Pvt. Ltd. at March 31st, 2017?
What Is Journal Entry?
A journal entry is a record of all daily business transactions in the books of account. A properly kept
journal entry accounting consists of the correct date, amounts to be debited, amount to be credited,
description of the transaction and a unique reference number of each transactions.
FEATURES OF A JOURNAL
1. It is a subsidiary book, which is used in addition to the ledger.
Ledger has five columns which include: Date, particulars, Folio, Debit (Dr), Credit (Cr).
2. It shows the account to be debited and credited with the amount of money.
3. It also narrates the transaction.
Entries will be posted to the ledgers
Example on how to solve journal problems:
On April 01, 2016 Anees started business with $100,000 and other transactions for the month are:
2. Purchase Furniture for Cash $7,000.
8. Purchase Goods for Cash $2,000 and for Credit $1,000 from Khalid Retail Store.
14. Sold Goods to Khan Brothers $12,000 and Cash Sales $5,000.
18. Owner withdrew of worth $2,000 for personal use.
22. Paid Khalid Retail Store $500.
26. Received $10,000 from Khan Brothers.

30. Paid Salaries Expense $2,000
What Is an Asset?
An asset is a resource with economic value that an individual, corporation, or country owns or controls
with the expectation that it will provide a future benefit.
Assets are reported on a company's balance sheet. They're classified as current, fixed, financial, and
intangible. They are bought or created to increase a firm's value or benefit the firm's operations.
An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or
improve sales, regardless of whether it's manufacturing equipment or a patent.
KEY TAKEAWAYS
1. An asset is a resource with economic value that an individual, corporation, or country owns or
controls with the expectation that it will provide a future benefit.
2.Assets are reported on a company's balance sheet.
They are bought or created to increase a firm's value or benefit the firm's operations.
3.An asset is something that may generate cash flow, reduce expenses or improve sales, regardless of
whether it's manufacturing equipment or a patent.
4. Assets can be classified as current, fixed, financial, or intangible.
What is Ethics ?
Ethics an be defined as established code of conduct, modes of behaviour, pattern , practice, standard
and Principles generally accepted or strictly adhered in a given profession or situation .
What is Accounting Ethics?
Accounting ethics refers to following specific rules and guidelines set by governing bodies that every
person associated with accounting should follow to prevent misuse of the financial information or their
management position.
The Accounting Ethics are :
1. Honesty :honesty means to be truthful , candid and forthright . It is the absence of lies and deception.
2. transparency: Transparency means to be open - mined, being straightforward in dealing with clients
without hypocrisy and pretense
3. Integrity: An accountant should behave with integrity in all professional , business and financial
relationships. Integrity implies not mere honesty but fair dealing and truthful.
Important Points
1. There are various rules and guidelines required to be followed by everyone associated with
accounting. Some of these rules include the rule of non-acceptability of the contingent fees, like setting
the audit fees based on the net profits of the clients, Confidentiality where the auditors have to keep all
the information of their clients confidential and are not allowed to disclose it to any outsider, duty
concerning the reporting of the breach of the rules by anyone, etc.
2. As the different rules and guidelines are set by the governing bodies that govern the person’s
activities associated with the accounting profession, this prevents the misuse of the information
available to the client by the accountant, auditor, or any other accounting person.
Conclusion
Accounting Ethics is one of the critical concepts according to which every person associated with
accounting has to follow certain types of rules and guidelines set by the different governing bodies
having the power to set the same. These rules and guidelines prevent the misuse of the different powers
given to the various accounting professionals.
What Is Accrual Accounting?
Accrual accounting is a financial accounting method that allows a company to record revenue before
receiving payment for goods or services sold and record expenses as they are incurred.
In other words, the revenue earned and expenses incurred are entered into the company's journal
regardless of when money exchanges hands. Accrual accounting is usually compared to cash basis of
accounting, which records revenue when the goods and services are actually paid for.
KEY TAKEAWAYS:
1. Accrual accounting is an accounting method where revenue or expenses are recorded when a
transaction occurs vs. when payment is received or made.
2. The method follows the matching principle, which says that revenues and expenses should be
recognized in the same period.
3. Accrual accounting uses the double-entry accounting method.
4. Accrual accounting is required for companies with average revenues of $25 million or more over three
years.
5. Cash accounting is the other accounting method, which recognizes transactions only when payment is
exchanged.
What Is an Investment?
An investment is an asset or item acquired with the goal of generating income or appreciation.
Appreciation refers to an increase in the value of an asset over time. When an individual purchases a
good as an investment, the intent is not to consume the good but rather to use it in the future to create
wealth.
An investment always concerns the outlay of some resource today—time, effort, money, or an asset—in
hopes of a greater payoff in the future than what was originally put in. For example, an investor may
purchase a monetary asset now with the idea that the asset will provide income in the future or will
later be sold at a higher price for a profit.
KEY TAKEAWAYS
1. An investment involves putting capital to use today in order to increase its value over time.
2. An investment requires putting capital to work, in the form of time, money, effort, etc., in hopes of a
greater payoff in the future than what was originally put in.
3. An investment can refer to any medium or mechanism used for generating future income, including
bonds, stocks, real estate property, or alternative investments.
4. Investments usually do not come with guarantees of appreciation; it is possible to end up with less
money than with what you started.
5. Investments can be diversified to reduce risk, though this may reduce the amount of earning
potential.
What Is an Installment Sale?
An installment sale is one of several possible approaches to revenue recognition under the rules
of General Accepted Accounting Principle (GAAP) More specifically, this method accounts for when
revenue and expense are recognized at the time of cash collection rather than at the time of sale. Based
on GAAP, this is the principal method of revenue recognition when the recognition occurs subsequently
to a sale.
KEY TAKEAWAYS
1. An installment sale is a form of revenue recognition where revenue and expenses are recognized at
the time of cash exchange.
2. Installment sales require the buyer to make regular payments—i.e. installments.
3. This method is useful for taxpayers looking to defer capital gains to future years.
4. These types of sales are common with real estate.

What Is Net of Tax?
The term net of tax refers to the amount left after adjusting for the effects of taxes. Net of tax can be a
consideration in any situation where taxation is involved. Individuals and businesses often analyze
before- and after-tax values to make investment and purchasing decisions. Net of tax is also an
important part of expense analysis when reviewing annual tax filings and the net income of businesses.
In simple word Net of tax refers to the amount of wages you have left after you subtract taxes.
KEY TAKEAWAYS
1. Net of tax” is a term that refers to the amount of income you have after subtracting taxes.
2. Net of tax is affected by tax rates, which are determined by several factors, such as income thresholds
and filing status.
3 Tax credits and deductions can reduce your tax liability, thus resulting in a more favorable net of tax.
4. Since income accumulated in retirement accounts or pensions is subject to taxes, individuals should
understand how their plans work to determine their net of tax income during retirement.
5. Net of tax is the amount left after adjusting for the effects of taxes.
6. Net of tax analysis can be important to consider in all situations where taxes may be involved.
7. Some scenarios where the net of tax can be especially important include large asset purchases with
sales tax, before and after-tax contributions, and income taxes for individuals or businesses.
What Is Gross Profit?
ss profit is the profit a company makes after deducting the costs associated with making and selling its
products, or the costs associated with providing its services. Gross profit will appear on a company's
income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue
(sales). These figures can be found on a company's income statement. Gross profit may also be referred
to as sales profit or gross income.
KEY TAKEAWAYS
1. Gross profit, also called gross income, is calculated by subtracting the cost of goods sold from
revenue. Generally, gross profit only includes variable costs and does not account for fixed costs.
2. Gross profit assesses a company's efficiency at using its labor and supplies in producing goods or
services.
3. Gross profit, which only reflects the cost of goods sold, is different than net profit which factors in all
company-wide expenses.
4. A derivative of gross profit is gross margin, a margin that indicates what percent of revenue a
company earns can be applied towards company operating costs.
Accrued Interest represents an unfulfilled interest expense amount still owed by a borrower to a lender
as of a particular date.
How to Calculate Accrued
Interest (Step-by-Step)
The term “accrued interest” refers to the total interest owed to a lender on a specified date.
Most debt financing arrangements, such as loans, require the borrower to make periodic interest
payments to the lender in exchange for capital.
But in the case here, the borrower has not yet paid the lender (and the lender has not yet received the
owed interest payment).
Per GAAP accounting reporting standards, all transactions must be recorded in the “correct” period, in
an effort to ensure consistency and transparency for investors.
Specifically, transactions under accrual accounting must be recorded on the date of occurrence (i.e.
once earned), irrespective of whether cash payment was received.
Under accrual accounting reporting standards established by GAAP, any interest that accrued is required
to be recorded along with an accrual, i.e. an adjusting entry to reflect that the interest remains unpaid.
1. Borrower Journal Entry: On the ledger of the borrower, the adjusting entries are a debit to the
“Interest Expense” account and a credit to the “Accrued Interest Payable” account.
2. Lender Journal Entry: In
contrast, the lender would debit the “Accrued Interest Receivable” account and credit the “Interest
Income” account.
The accrued interest payable is recognized as a current liability, whereas the receivable counterpart is
recorded as a current asset since both are assumed to be resolved soon (<12 months).
Once the interest amount is paid in cash, the journal entries will be adjusted to reflect that the borrower
has paid the owed interest to the lender.
Accrued Interest Formula
The formula for calculating accrued interest is as follows.
1. Loan Principal: The original loan amount on the date of initial issuance.
2. Interest Rate (%): The cost of financing charged by the lender on the loan.
3. Days: The number of days until the end of the month.
Step 1: loan financing and interest rate Assumptions
Suppose a company has raised $2 million in debt financing on June 15, 2022, roughly the mid-point of
the month.
The annual interest rate on the loan is 5%, which can be multiplied by the total loan amount to arrive at
an annual interest expense of $100k.
1. Total Loan Principal = $2mm
2. Interest Rate = 5
3.Annual Interest Expense = $2mm * 5% = $100k
By dividing the annual interest expense by the number of months in a year (12) we can calculate the
monthly interest expense as approximately $8k.
4. Monthly Interest Expense = $100k / 12 = $8k
Per the loan agreement, the first interest payment comes due in 30 days, i.e. July 15, 2022.
Step 2. Accrued Interest Calculation Example
The monthly accounting period ends on June 30, 2022, meaning that there are 15 days remaining from
the date of initial financing to the end of the month.
Step 1: The amount of interest recognized as accrued can be calculated by first dividing the number of
days until the end of the month by the number of days in the year (360 days).
Step 2: In the next step, we’ll multiply the resulting figure from above by the annual interest rate (5%).
Step 3: Finally, the resulting figure is multiplied by the total loan principal ($2mm) to arrive at $4k as the
estimated amount, i.e. $2mm * [5%*(15/360)] = $4k
Step 3. Journal Entry Example (Debit and Credit)
As the end of the accounting period comes near, the borrower and lender must adjust their ledger to
account for the interest that accrued.
Starting with the borrower, we’ll go through the journal entries in their ledger as of June 30, 2022.
1. Interest Expense = $4k Debit
2. Accrued Interest Payable = $4k Credit
In short, the adjustments above reflect how the interest was not yet paid, which is why the “Interest
Expense” account was debited, and the “Accrued Interest Payable” account was credited.
On the other hand, the lender’s journal entries will be as follows.
3. Accrued Interest Receivable = $4k Debit
4. Interest Income = $4k Credit
The lender’s adjusting entry debited “Accrued Interest Receivable” and credited “Interest Income”.
Once the next accounting period rolls around, these adjusting entries would be reversed.
What Is Net Present Value (NPV)?
Net present value (NPV) is the difference between the present value of cash inflows and the present
value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning
to analyze the profitability of a projected investment or project.
NPV is the result of calculations that find the current value of a future stream of payments, using the
proper discount rate. In general, projects with a positive NPV are worth undertaking while those with a
negative NPV are not.
KEY TAKEAWAYS
1. Net present value (NPV) is used to calculate the current value of a future stream of payments from a
company, project, or investment.
2. To calculate NPV, you need to estimate the timing and amount of future cash flows and pick a
discount rate equal to the minimum acceptable rate of return.
3. The discount rate may reflect your cost of capital or the returns available on alternative investments
of comparable risk.
4. If the NPV of a project or investment is positive, it means its rate of return will be above the discount
rate.
What Is a Cost-Benefit Analysis?
A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make
and which to forgo. The cost-benefit analyst sums the potential rewards expected from a situation or
action and then subtracts the total costs associated with taking that action. Some consultants or analysts
also build models to assign a dollar value on intangible items, such as the benefits and costs associated
with living in a certain town.
KEY TAKEAWAYS
1. A cost-benefit analysis is the process used to measure the benefits of a decision or taking action
minus the costs associated with taking that action.
2. A cost-benefit analysis involves measurable financial metrics such as revenue earned or costs saved as
a result of the decision to pursue a project.
3. A cost-benefit analysis can also include intangible benefits and costs or effects from a decision such as
employees morale and customer satisfaction.
4. More complex cost-benefit analysis may incorporate sensitivity analysis, discounting of cashflows, and
what-if scenario analysis for multiple options.
5. All else being equal, an analysis that results in more benefits than costs will generally be a favorable
project for the company to undertake.
What Is Accountant's Liability?
An accountant's liability describes the legal liability assumed while performing professional duties. An
accountant is liable for a client's accounting misstatements. This risk of being responsible for fraud or
misstatement forces accountants to be knowledgeable and employ all applicable accounting standards.
An accountant who is negligible in their examination of a company can face legal charges from either the
company, investors, or creditors that rely on the accountant's work. The accountant could also be
responsible for the financial losses incurred from any incorrect representation of a company's books.
This possible negative scenario often leads to accountants taking out professional liability insurance.
KEY TAKEAWAYS
1. Accountant's liability refers to the legal liability assumed by an individual when conducting
professional accounting work.
2. Accountants are liable for any misstatements that occurred while auditing and preparing financial
documents for a client.
3. Because accountants are held responsible for any inaccuracies and as a result can face legal charges
or monetary losses, they often take out professional liability insurance.
4. The type of professional liability insurance is often known as errors and omissions insurance.
5. Under the generally accepted accounting principles (GAAP), an accountant will usually not be held
liable for any misstatements if they acted in good faith.
What Is Mutual Fund NAV?
Mutual fund net asset value (NAV) represents a fund's per share market value. It is the price at which
investors buy (bid price) fund shares from a fund company and sell them (redemption price) to a fund
company.
A fund's NAV is calculated by dividing the total value of all the cash and securities in a fund's portfolio,
less any liabilities, by the number of shares outstanding.
KEY TAKEAWAYS
1. Net asset value (NAV) represents a fund's per-share intrinsic value.
2. It is similar in some ways to the book value of a company.
3. NAV is calculated by dividing the total value of all the cash and securities in a fund's portfolio, minus
any liabilities, by the number of outstanding shares.
4. The NAV calculation is important because it tells us how much one share of the fund should be worth.
5. The actual market value of a fund may differ slightly from its NAV, which may represent a buying or
selling opportunity.
Calculation of Value of Stock Dividend
Number of shares to be distributed as stock dividend
500000 × 7% = 35,000
Market Value = 100
Value of Stock Dividend = 35000 × 100
= 3,500,000
What Is Devaluation?
Devaluation is the deliberate downward adjustment of the value of a country's money relative to
another currency, group of currencies, or currency standard. Countries that have a fixed exchange rate
or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is
the opposite of revaluation, which refers to the readjustment of a currency's exchange rate.
KEY TAKEAWAYS
1. Devaluation is the deliberate downward adjustment of a country's currency value.
2. The government issuing the currency decides to devalue a currency.
3. Devaluing a currency reduces the cost of a country's exports and can help shrink trade deficits.
What Is an Income Statement?
An income statement is one of the three important financial statements used for reporting a company’s
financial performance over a specific accounting period. The other two key statements are the balance
sheet and the cash flow statement.
The income statement focuses on the revenue, expenses, gains, and losses of a company during a
particular period. Also known as the profit and loss (P&L) statement or the statement of revenue and
expense, an income statement provides valuable insights into a company’s operations, the efficiency of
its management, underperforming sectors, and its performance relative to industry peers.
KEY TAKEAWAYS
1. An income statement is one of the three major financial statements, along with the balance sheet and
the cash flow statement, that report a company’s financial performance over a specific accounting
period.
2. The income statement focuses on the revenue, expenses, gains, and losses of a company during a
particular period.
3. An income statement provides valuable insights into a company’s operations, the efficiency of its
management, underperforming sectors, and its performance relative to industry peers.
What Is Cost of Goods Sold (COGS)?
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This
amount includes the cost of the materials and labor directly used to create the good. It excludes indirect
expenses, such as distribution costs and sales force costs.
Cost of goods sold is also referred to as "cost of sales."
KEY TAKEAWAYS
1. Cost of goods sold (COGS) includes all of the costs and expenses directly related to the production of
goods.
2. COGS excludes indirect costs such as overhead and sales & marketing.
3. COGS is deducted from revenues (sales) in order to calculate gross profit and gross margin. Higher
COGS results in lower margins.
4. The value of COGS will change depending on the accounting standards used in the calculation.
5. COGS differs from operating expenses (OPEX) in that OPEX includes expenditures that are not directly
tied to the production of goods or services.
What Is Gross Profit?
Gross profit is the profit a company makes after deducting the costs associated with making and selling
its products, or the costs associated with providing its services. Gross profit will appear on a company's
income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue
(sales). These figures can be found on a company's income statement. Gross profit may also be referred
to as sales profit or gross income.
KEY TAKEAWAYS
1. Gross profit, also called gross income, is calculated by subtracting the cost of goods sold from
revenue.
2. Generally, gross profit only includes variable costs and does not account for fixed costs.
3. Gross profit assesses a company's efficiency at using its labor and supplies in producing goods or
services.
4. Gross profit, which only reflects the cost of goods sold, is different than net profit which factors in all
company-wide expenses.
5. A derivative of gross profit is gross margin, a margin that indicates what percent of revenue a
company earns can be applied towards company operating costs.
Top 20 Bookkeeper Job Interview Questions and Answers 2022
Knowing what to expect during the interview can make all the difference. Here is a list of the 20
questions you are likely to be asked during your bookkeeper job interview.
1. Why Are You Interested In This Role?
This question allows the interviewer to know the values you can add to their team. While answering this
question, focus more on the values you can bring to the team.
Sample Answer
“My passion for bookkeeping drives me to work in this field. I knew I would become a bookkeeper when
I was still young. My passion to see small businesses succeeding began when my mum’s business failed
due to serious bookkeeping errors. I am dedicated to helping clients in checking cash flow issues to
ensure that their business succeeds.”
2. What Are The Roles Of A Bookkeeper?
The hiring team asks this question to find out if you are aware of what is expected of you should you be
hired. Explain a few responsibilities of a bookkeeper as you connect to the job description.
Sample Answer
“A skilled bookkeeper records a business’s financial transactions after which he/she creates financial
reports from that data. A bookkeeper also manages cash receipts, customers’ and suppliers’ receipts.
He/ she reviews and reconciles all business accounts to ensure that they are accurate.”
3. What Are The Qualities That A Bookkeeper Needs To Be Successful?
Your answer to this question will demonstrate whether you know the best qualities that a bookkeeper
should possess. Describe some of the traits that a skilled bookkeeper needs to have.
Sample Answer “For a bookkeeper to be successful needs to be attentive to details, have basic
arithmetic, and computer skills. A bookkeeper needs to have abilities to prepare and produce
spreadsheets as well as being able to use bookkeeping software”.
4. What Major Challenges Did You Face During Your Last Role? How Did You Manage Them?
The interviewer asks this question to evaluate your problem-solving ability. Describe how the challenge
took place and how you managed it.
Sample Answer “When I began working in this industry, I had challenges to consistently maintain the
records of the book. Over the years, I learned that keeping the records up to date needed time and
effort. I have improved significantly on my time management skills that have made me enjoy working in
this industry. Recently, I received the award as the best bookkeeper of the year.”
5. Describe Your Daily Routine As A Bookkeeper.
The recruiting manager wants to evaluate how you prioritize your daily work. Describe all the tasks you
perform in your recent role and align them with what your potential employer is looking for in the right
candidate for the job.
Sample Answer “My daily routine rotates around tracking all cash flows, billing, and lines of credit that
affect my company. I cut and mail checks to vendors for purchases. I find myself talking to customers
and vendors for purposes of order supplies and other services.”
What is Bonds Payable?
Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. This
account typically appears within the long-term liabilities section of the balance sheet, since bonds
typically mature in more than one year. If they mature within one year, then the line item instead
appears within the current liabilities section of the balance sheet.
Terms of bonds payable are contained within a bond indenture agreement, which states the face
amount of the bonds, the interest rate to be paid to bond holders, special repayment terms, and any
covenants imposed on the issuing entity.
An entity is more likely to incur a bonds payable obligation when long-term interest rates are low, so
that it can lock in a low cost of funds for a prolonged period of time. Conversely, this form of financing is
less commonly used when interest rates spike. Bonds are typically issued by larger corporations and
governments.
What Is a Contra Account?
A contra account is used in a general ledger to reduce the value of a related account when the two are
netted together. A contra account's natural balance is the opposite of the associated account. If a debit
is the natural balance recorded in the related account, the contra account records a credit. For example,
the contra account for a fixed asset is accumulated depreciation.
KEY TAKEAWAYS
1. A contra account is an account used in a general ledger to reduce the value of a related account.
2. They are useful to preserve the historical value in a main account while presenting a decrease or
write-down in a separate contra account that nets to the current book value.
3. Contra accounts are presented on the same financial statement as the associated account, typically
appearing directly below it with a third line for the net amount.
4. Note that accountants use contra accounts rather than reduce the value of the original account
directly to keep financial accounting records clean.
5. Key examples of contra accounts include accumulated deprecation and allowance for doubtful
accounts.
What Is a Bad Debt Reserve?
A bad debt reserve is the dollar amount of receivables that a company or financial institution does not
expect to actually collect. This includes business payments due and loan repayments. A bad reserve is
also known as an allowance for doubtful accounts (ADA).
KEY TAKEAWAYS
1. A bad debt reserve estimates the portion of a company's or financial institution's accounts receivables
or loan portfolio that may default or become uncollectible.
2. The bad debt reserve allows the company or bank to state the face value of its receivables or loans.
3. A bad debt reserve helps a company plan its cash flow needs by allowing management to identify
uncollectible accounts and raise capital if needed.
4. Companies may overestimate their reserves, leading to a weak short-term outlook, but the future
outlook may improve if the doubtful accounts are collected.
What Is an Allowance for Doubtful Accounts?
An allowance for doubtful accounts is a contra account that nets against the total receivables presented
on the balance sheet to reflect only the amounts expected to be paid. The allowance for doubtful
accounts estimates the percentage of accounts receivable that are expected to be uncollectible.
However, the actual payment behavior of customers may differ substantially from the estimate.
KEY TAKEAWAYS
1. The allowance for doubtful accounts is a contra account that records the percentage of receivables
expected to be uncollectible.
2. The allowance is established in the same accounting period as the original sale, with an offset to bad
debt expense.
3. The percentage of sales method and the accounts receivable aging method are the two most common
ways to estimate uncollectible accounts.
What Are the Generally Accepted Accounting Principles (GAAP)?
Generally accepted accounting principles (GAAP) refer to a common set of accounting rules, standards,
and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the U.S.
must follow GAAP when their accountants compile their financial statements.
GAAP is guided by ten key tenets and is a rules-based set of standards. It is often compared with the
International Financial Reporting Standards (IFRS), which is considered more of a principles-based
standard. IFRS is a more international standard, and there have been recent efforts to transition GAAP
reporting to IFRS.
The 10 Key Principles of GAAP:
There are 10 general concepts that lay out the main mission of GAAP.
1. Principle of Regularity:
The accountant has adhered to GAAP rules and regulations as a standard.
2. Principle of Consistency:
Accountants commit to applying the same standards throughout the reporting process, from one period
to the next, to ensure financial comparability between periods. Accountants are expected to fully
disclose and explain the reasons behind any changed or updated standards in the footnotes to the
financial statements.
3. Principle of Sincerity:
The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.
4. Principle of Permanence of Methods:
The procedures used in financial reporting should be consistent, allowing a comparison of the
company's financial information.
5. Principle of Non-Compensation:
Both negatives and positives should be reported with full transparency and without the expectation of
debt compensation.
6. Principle of Prudence:
This refers to emphasizing fact-based financial data representation that is not clouded by speculation.
7. Principle of Continuity:
While valuing assets, it should be assumed the business will continue to operate.
8. Principle of Periodicity:
Entries should be distributed across the appropriate periods of time. For example, revenue should be
reported in its relevant accounting period.
9. Principle of Materiality:
Accountants must strive to fully disclose all financial data and accounting information in financial
reports.
10. Principle of Utmost Good Faith:
Derived from the Latin phrase uberrimae fidei used within the insurance industry. It presupposes that
parties remain honest in all transactions.
KEY TAKEAWAYS
1. GAAP is the set of accounting rules set forth by the FASB that U.S. companies must follow when
putting together financial statements.
2. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial
information.
3. GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method.
4. The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent,
and comparable.
5. GAAP is used mainly in the U.S., while most other jurisdictions use the IFRS standards.
What Is an Accounting Ratio?
Accounting ratios, an important sub-set of financial ratios, are a group of metrics used to measure the
efficiency and profitability of a company based on its financial reports. They provide a way of expressing
the relationship between one accounting data point to another and are the basis of ratio analysis.
Most common accounting ratios, There are many types of accounting ratios, depending on the
information they contain. Here is a list of the ratios we use most frequently:
1. Absolute Liquid Ratio: is the relationship between absolute liquid, or super quick current assets, and
liabilities.
2.Activity Ratios: measure a company’s ability to convert different accounts within its balance sheets
into cash or sale.
3. Asset Turnover Ratios: measure the efficiency of a commercial entity’s use of its assets in generating
sales revenue to the business.
4. Current Cash Debt Coverage Ratio: measures the relationship between net cash that operating
activities provide and the average current liabilities of the firm.
5. Current Ratio or Working Capital Ratio :measures a business’ ability to pay short- and long-term
obligations.
6. Debt Service Coverage Ratio:also known as DSCR, is the ratio of liquid cash available for debt servicing
to interest, principal, and lease payments. It measures a firm’s ability to service its current debts. We
determine this by comparing its net operating income to its total debt service obligation.
7. Dividend Policy Ratios:the most common are Dividend Payout Ratio, Dividend Yield and Dividend
Cover. The Dividend Payout Ratio tells us how well earnings support dividend payouts.
8. Financial Leverage Ratios: measure the overall debt load of a commercial enterprise and compare it
with the assets or equity.
9. Liquidity Ratios: tell us what the cash levels of a firm are. Additionally, we can learn whether it can
turn assets into cash to pay off debts and current obligations. This type of ratio tells us how well a
company can pay off both its current liabilities as they become due.
10. Profitability Ratios :are measures that tell us how well a company is performing. In other words, it
tells us whether the business can generate profit.
11. Quick Ratio or Acid Test Ratio: measures a firm’s liquidity and ability to meet its financial obligations.
Business people view it as a sign of a business’ financial strength or weakness.
KEY TAKEAWAYS
1. Accounting ratios, an important sub-set of financial ratios, are a group of metrics used to measure the
efficiency and profitability of a company based on itsi financial reports.
2. An accounting ratio compares two line items in a company’s financial statements, namely made up of
its income statement, balance sheet, and cash flow statement.
3. These ratios can be used to evaluate a company’s fundamentals and provide information about the
performance of the company over the last quarter or fiscal year.
4. Common accounting ratios include the debt-to-equity ratio, the quick ratio, the dividend payout ratio,
gross margin, and operating margin.
5. Accounting ratios are used by both the company itself to make improvements or monitor progress as
well as by investors to determine the best investment option.
What Is a Dividend?
A dividend is the distribution of a company's earnings to its shareholders and is determined by the
company's board of directors. Dividends are often distributed quarterly and may be paid out as cash or
in the form of reinvestment in additional stock.
The dividend yield is the dividend per share and is expressed as dividend/price as a percentage of a
company's share price, such as 2.5%.
Common shareholders of dividend-paying companies are eligible to receive a distribution as long as they
own the stock before the ex-dividend date.
KEY TAKEAWAYS
1. A dividend is the distribution of corporate earnings to eligible shareholders.
2. Dividend payments and amounts are determined by a company's board of directors.
3. The dividend yield is the dividend per share, and expressed as a percentage of a company's share
price.
4. Many companies do not pay dividends and instead retain earnings to be invested back into the
company
What Is First In, First Out (FIFO)?
First In, First Out, commonly known as FIFO, is an asset-management and valuation method in which
assets produced or acquired first are sold, used, or disposed of first.
For tax purposes, FIFO assumes that assets with the oldest costs are included in the income statement's
cost of goods sold (COGS). The remaining inventory assets are matched to the assets that are most
recently purchased or produced.
KEY TAKEAWAYS
1. First In, First Out (FIFO) is an accounting method in which assets purchased or acquired first are
disposed of first.
2. FIFO assumes that the remaining inventory consists of items purchased last.
3. An alternative to FIFO, LIFO is an accounting method in which assets purchased or acquired last are
disposed of first.
4. Often, in an inflationary market, lower, older costs are assigned to the cost of goods sold under the
FIFO method, which results in a higher net income than if LIFO were used.
What Is an Accounting Period?
An accounting period is an established range of time during which accounting functions are performed,
aggregated, and analyzed. An accounting period may consist of weeks, months, quarters, calendar years,
or fiscal years. The accounting period is useful in investing because potential shareholders analyze a
company’s performance through its financial statements, which are based on a fixed accounting period.
KEY TAKEAWAYS
1. An accounting period is a span of time that covers certain accounting functions; it can be either a
calendar or fiscal year, but also a week, month, or quarter, for example.
2. Accounting periods are created for reporting and analyzing purposes, and the accrual method of
accounting allows for consistent reporting.
3. Accrual accounting is governed by two important principles: revenue recognition and matching.
4. The revenue recognition principle states that revenue should be reported when it is earned, rather
than when the cash is received.
5. The matching principle states that an expense should be reported in the same accounting period as
the revenue generated by the expense.
What Is Liquidation?
Liquidation in finance and economics is the process of bringing a business to an end and distributing its
assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot
pay its obligations when they are due. As company operations end, the remaining assets are used to pay
creditors and shareholders, based on the priority of their claims. General partners are subject to
liquidation.
The term liquidation may also be used to refer to the selling of poor-performing goods at a price lower
than the cost to the business or at a price lower than the business desires.
KEY TAKEAWAYS
1. The term liquidation in finance and economics is the process of bringing a business to an end and
distributing its assets to claimants.
2. A bankrupt business is no longer in existence once the liquidation process is complete and it has been
deregistered.
3. Liquidation usually occurs during the bankruptcy process .
4. Proceeds are distributed to claimants in order of priority. Creditors receive priority over shareholders.
5. Liquidation can also refer to the process of selling off inventory, usually at steep discounts.
What Are Shares?
Shares are units of equity ownership in a corporation. For some companies, shares exist as a financial
asset providing for an equal distribution of any residual profits, if any are declared, in the form of
dividends. Shareholders of a stock that pays no dividends do not participate in a distribution of profits.
Instead, they anticipate participating in the growth of the stock price as company profits increase.
Shares represent equity stock in a firm, with the two main types of shares being common shares and
preferred shares. As a result, "shares" and "stock" are commonly used interchangeably.
KEY TAKEAWAYS
1. Shares represent equity ownership in a corporation or financial asset, owned by investors who
exchange capital in return for these units.
2. Common shares enable voting rights and possible returns through price appreciation and dividends.
3. Preferred shares do not offer price appreciation but can be redeemed at an attractive price and offer
regular dividends.
4. Most companies have shares, but only the shares of publicly traded companies are found on stock
exchanges.
Current Assets vs. Noncurrent Assets:
An Overview
In financial accounting, assets are the resources that a company requires in order to run and grow its
business. Assets are divided into two categories: current and noncurrent assets, which appear on a
company's balance sheet and combine to form a company's total assets. You may think of current assets
as short-term assets, which are necessary for a company's immediate needs; whereas noncurrent assets
are long-term, as they have a useful life of more than a year.
KEY TAKEAWAYS
1. Current assets are a company's short-term assets; those that can be liquidated quickly and used for a
company's immediate needs.
2. Noncurrent assets are long-term and have a useful life of more than a year.
3. Examples of current assets include cash, marketable securities, inventory, and accounts receivable.
Examples of noncurrent assets include long-term investments, land, property, plant, and equipment
(PP&E), and trademarks
4 Current assets are most often valued at market prices whereas noncurrent assets are valued at cost
less depreciation.
5.Capital gains tax applies to profits on the sale of assets held for more than a year (noncurrent assets).
What Is a Perpetual Inventory System?
A perpetual inventory system is based on an accounting method known as perpetual inventory that
continuously records inventory changes in real-time with computerized point-of-sale systems, removing
the need for physical inventory checks.
1 It provides a highly detailed view of changes in inventory with immediate reporting of the amount of
inventory in stock, and accurately reflects the level of goods on hand.
Within this system, a company makes no effort to keep detailed inventory records of products on hand;
rather, purchases of goods are recorded as a debit to the inventory database. A perpetual inventory
system is distinguished from a periodic inventory system, a method in which a company maintains
records of its inventory by regularly scheduled physical counts.
KEY TAKEAWAYS
1. Perpetual inventory systems track the sale of products immediately through the use of point-of-sale
systems.
2. The perpetual inventory method does not attempt to maintain counts of physical products.
3. Perpetual inventory systems are in contrast to periodic inventory systems, in which reoccurring
counts of products are utilized in record-keeping.
4. Perpetual inventory systems are especially suitable for large companies that track high volume sales.
Periodic physical counts are still necessary with a perpetual system but conducted less often and at
lower cost and scale.
What Is Beginning Inventory?
Beginning inventory is the total monetary value of items that are in stock and ready to use or sell at the
start of an accounting period. Also called opening inventory, beginning inventory matches the previous
accounting period's ending inventory. Or
Beginning inventory is the book value of a company’s inventory at the start of an accounting period. It is
also the value of inventory carried over from the end of the preceding accounting period.
Keynote:
1. Beginning inventory is the total monetary value of items that are in stock.
2. Beginning inventory is also know as opening inventory.

3. Companies must choose an inventory accounting method for calculating the value of inventory.
What is amortization ?
Amortization is known as an accounting technique used to periodically reduce the book value of a loan
or intangible asset across a set period. In relation to a loan, amortization concentrates on casting out
loan payments over time. When applied to an asset, amortization is slightly similar to depreciation.Or
amortization is the practice of writing down the value of an intangible asset, such as a copyright or
patent, over its useful life. Amortization expenses can affect a company’s income statement and balance
sheet, as well as its tax liability.
The primary advantage of amortization is that it is a tax deduction in the current tax year, even if you did
not pay cash for the asset. As long as the asset is in use, it can be deducted from your tax burden.
Additionally, it allows you to have more income and more assets on the balance sheet.
Keynote:
1.Amortization is the accounting process used to spread the cost of intangible assets over the periods
expected to benefit from their use.
2. Amortization schedules are used by lenders, such as financial institutions, to present a loan
repayment schedule based on a specific maturity date.
3. Amortization expenses can affect a company’s income statement and balance sheet, as well as its tax
liability.
4. We have types of amortization, according to their category, example we have amortization of assets,
amortization of loan, amortization of expenses, amortization schedule, etc.
What is internal audit ?
Internal auditing is an independent, objective assurance and consulting activity designed to add value
and improve an organization's operations.
It checks how well a company maintains operational efficiency and manages accounting processes while
complying with its standard rules and regulations. Conducting audits from time to time ensures the firms
are strict enough in following the administrative fundamentals and sticking to a maximum accuracy rate
so far as financial reporting is concerned.
It evaluate a company's internal controls, including its corporate governance and accounting processes.
example of a common type of internal audit is an inventory audit. These are primarily designed to
ensure the physical inventory counts match the company's financial records. Inventory audits are
important because inaccurate reporting of inventory will result in material errors in reported financial
information.
Another example ,is an auditing evidence supports and verifies the final information provided by
management in the financial statements. It can also contradict it if there are errors or fraud. Examples of
auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices,
and receipts.
KEYNOTE:
1. Internal auditing is an independent, objective assurance and consulting activity designed to add value
and improve an organization's operations.
2. It evaluate a company's internal controls, including its corporate governance and accounting
processes.
3. It checks how well a company maintains operational efficiency and manages accounting processes
while complying with its standard rules and regulations.
What is fictitious asset ?
Fictitious assets have no physical existence or realisable value, but the company shows them as a cash
expenditure in the books of accounts.
Fictitious assets are the type of assets that have no physical existence. This means that such assets do
not have any realizable value. However, they are reported as actual cash expenditures in financial
statements. These are expenses and losses that are not offset in the profit and loss account.
Fictitious assets do not have a tangible existence or any realisable value, but they get reported as actual
cash expenditure in the financial statements. Example of fictitious asset are
Promotional Expenses, Preliminary Expenses,
Discount on issue of shares.
Discount/Loss on issue of debentures.
KEYNOTE
1. Fictitious assets are the type of assets that have no physical existence.
2. Fictitious assets do not have a tangible existence or any realisable value.
3. These are expenses and losses that are not offset in the profit and loss account.
What is annual turnover ?
Annual turnover is the percentage rate at which something changes ownership over the course of a
year. For a business, this rate could be related to its yearly turnover in inventories, receivables, payables,
or assets.
Putting it in simple words turnover is the total amount of money your business receives from the sale of
goods and services – minus discounts and VAT.
To calculate the turnover ratio, divide the amount of new securities purchased and the amount of
securities sold by the total assets under management within the mutual fund or the ETF. It will give a
percentage amount and can be used to describe the turnover of a fund annually.
The Turnover is a measure of total income from sales, whereas profit is total income minus expenses.
For example, if a business makes $100,000 in sales over a year, its annual turnover is $100,000.
KEYNOTE
1. Annual turnover is the percentage rate at which something changes ownership over the course of a
year.
2.To calculate the portfolio turnover ratio for a given fund, first determine the total amount of assets
purchased or sold (whichever happens to be greater), during the year. Then, divide that amount by the
average assets held by the fund over the same year.
3. Annual Turnover is a measure of total income from sales, whereas profit is total income minus
expenses.
What is bankruptcy ?
Bankruptcy is a legal process through which people or other entities who cannot repay debts to
creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by
a court order, often initiated by the debtor.
Bankrupt is not the only legal status that an insolvent person may have, and the term bankruptcy is
therefore not a synonym for insolvency.
How Bankruptcy Works:
Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that they can't pay.
Meanwhile, creditors have a chance to get some repayment based on the individual's or business's
assets available for liquidation.
In theory, the ability to file for bankruptcy benefits the overall economy by allowing people and
companies a second chance to gain access to credit. It can also help creditors regain a portion of debt
repayments.
bankruptcies are paid for by the person filing bankruptcy. the court fees and cost of an attorney are all
required to be paid by the filer, as are any non-dischargeable debts that bankruptcy cannot clear.
discharged debts are not paid by anyone; they are absorbed as losses by the creditor .
KEYNOTE:
1. Bankruptcy is a legal proceeding initiated when a person or business is unable to repay outstanding
debts or obligations.
2. bankruptcy is not a synonym for insolvency.
3. Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that they can't
pay.
What is debit ?
A debit (DR) is an entry made on the left side of an account. It either increases an asset or expense
account or decreases equity, liability, or revenue accounts.
Or Debits are the opposite of credits. Debits represent money being paid out of a particular account;
credits represent money being paid in. In a standard journal entry, all debits are placed as the top lines,
while all credits are listed on the line below debits.
Debit is the positive side of a balance sheet account, and the negative side of a result item. In
bookkeeping, debit is an entry on the left side of a double-entry bookkeeping system that represents the
addition of an asset or expense or the reduction to a liability or revenue. The opposite of a debit is a
credit.
Assets and expenses have natural debit balances. This means that positive values for assets and
expenses are debited and negative balances are credited. For example, upon the receipt of $1,000 cash,
a journal entry would include a debit of $1,000 to the cash account in the balance sheet, because cash is
increasing.
KEYNOTE
1. A debit is an entry made on the left side of an account.
2. The abbreviation for debit is DR
3. The opposite of a debit is a credit.
4. Debit is the positive side of a balance sheet account, and the negative side of a result item.

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what is the Accounting Ratios?

Types of Accounting Ratios

Example #1 – Liquidity Ratios

The formula to derive the aforementioned ratios are given below:

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Current Assets Less Inventory / Current Liabilities

Cash Ratio = Cash + Marketable Securities / Current Liabilities

Example #2 – Profitability Ratios

The formula to derive the aforementioned ratios are given below:

Gross Profit Ratio = (Gross Profit / Net Sales) * 100

Example #3 – Activity Ratios

Inventory Turnover Ratio:

This ratio measures the times taken to convert inventory in sales.

Debtors Turnover Ratio:

The formula to derive the aforementioned ratios are given below:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Debtors Turnover = Net Sales / Average Debtors

Total Assets Turnover = Sales / Average Total Assets

Fixed Assets Turnover = Sales / Average Fixed Assets

Accounting for you learning, [17-Apr-22 9:25 PM]

Example #4 – Leverage Ratios

The formula to derive the aforementioned ratios are given below:

Debt Equity Ratio = Total Debt / Total Equity

Debt Ratio = Total Liabilities / Total Capital

Proprietary Ratio = Shareholders Funds / Total Assets

Accounting for you learning, [21-Apr-22 7:56 PM]

WHAT ARE DIVIDEND STOCKS?

dividend stocks explained

Dividend yield = Annual dividend per share/ Price per share.

Accounting for you learning, [23-Apr-22 7:51 AM]

What is Break-even Point?

Break-Even Point (BEP)

What is Contribution Margin in Relation to Break-even Point?

How to Calculate for Break-even Point

That’s the accounting break-even.

To compute for break-even point in dollars, the following formula is followed:

That’s the financial break-even.

Factors that Increase a Company’s Break-even Point

1. Increase in customer sales

2. Increase in production costs

How to Reduce the Break-even Point

1. Raise product prices

Profit and Loss Accounting

Definition of Profit and Loss Accounting

The main components of a profit and loss account are –

RevenueCost of goods soldSelling administrative and general expensesMarketing and advertising

Examples of Profit and Loss Accounting

Consolidated Statement of Operations

Net Sales 1,40,0001,00,000

Net Service 60,00040,000

Total Net Sales (A)2,00,0001,40,000

Operating Expenses:Cost of Goods Sold 1,00,00080,000

Research and Development 20,00012,000

General and Administrative 4,0003,000

Other Operating Expenses500300 Total Operating Expenses (B)1,59,5001,21,300

Operating Income (C) = (A-B)40,50018,700

Provision for Income Tax 4,8002,100

Net Income 35,00016,000

ParticularsAmount ($)Purchases 10,00,000 Opening Stock1,00,000 Closing Stock 1,50,000

Gross Sales 15,00,000

Bad Debts 10,000

Adm. Expenses 2,00,000

Selling and D Bs. Exp.30,000 Dividend Distributed to Equity Share Holders15,000

Profit and Loss A/c