Best Book Keeping Interview Questions Part – 2

What Is The Provision For Bad Debts?

The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, or Allowance for Uncollectible Accounts. In this case Provision for Bad Debts is a contra asset account (an asset account with a credit balance).

It is used along with the account Accounts Receivable in order to report the net realizable value of the accounts receivable.

Provision for Bad Debts might also be an the income statement account also known as Bad Debt Expense or Uncollectible Account Expense. In this situation, the Provision for Bad Debts reports the credit losses that pertain to the period shown on the income statement.

Why Is Accumulated Depreciation An Asset Account?

Having an asset account such as Accumulated Depreciation allows a company’s balance sheet to easily report both

the amount of an asset’s cost that has been depreciated as of the date of the balance sheet, and
the asset’s cost. This is possible because Accumulated Depreciation is credited each time that Depreciation Expense is debited.
Since Accumulated Depreciation will have a continually increasing credit balance it is referred to as a contra asset account .

To illustrate, let’s assume that at the beginning of the current year a company’s asset account Equipment reports a cost of $70,000. From the time of purchase until the beginning of the year the related Accumulated Depreciation account has accumulated a credit balance of $45,000.

During the current year the company debits Depreciation Expense for $10,000 and credits Accumulated Depreciation for $10,000. At the end of the current year the credit balance in Accumulated Depreciation will be $55,000.

By crediting the account Accumulated Depreciation instead of crediting the Equipment account, the balance sheet at the end of the year can easily report both the equipment’s cost of $70,000 and its accumulated depreciation of $55,000.

This is more informative than reporting only the net amount of $15,000 (which would likely be the case if the contra asset account Accumulated Depreciation was not used).

What Is A Liability?

A liability is an obligation and it is reported on a company’s balance sheet. A common example of a liability is accounts payable. Accounts payable arise when a company purchases goods or services on credit from a supplier. When the company pays the supplier, the company’s accounts payable is reduced.

Other common examples of liabilities include loans payable, bonds payable, interest payable, wages payable, and income taxes payable.

Less common liabilities are customer deposits and deferred revenues. Deferred revenues come about when customers prepay a company for work to be done in a future accounting period. When the company performs the work, the liability will be reduced and the company will report the amount it earned as revenues on its income statement.

Liabilities are also part of the accounting equation: Assets = Liabilities + Stockholders’ Equity. Liabilities are often viewed as claims on a company’s assets. However, liabilities can also be thought of as a source of a company’s assets.

What Is The Meaning Of Sundry And Sundry Debtors?

Sundry can mean various, miscellaneous, or diverse. Sundry debtors might refer to a company’s customers who rarely make purchases on credit and the amounts they purchase are not significant.

I suspect that the term sundry was more common when bookkeeping was a manual task. In other words, prior to the low cost of computers and accounting software, a bookkeeper had to add a page to the company’s ledger book for every new customer.

If a new page was added for every occasional customer, the ledger book would become unwieldly. It was more practical to have one page entitled sundry on which those occasional customers’ small transactions were entered.

With the efficiency and low cost of today’s accounting systems, I believe the need for classifying customers and accounts as sundry has been greatly reduced.

What Does Debit Memo Mean On A Bank Statement?

A debit memo on a bank statement refers to a deduction from the bank account’s balance. In other words, a debit memo has the same effect as a check written on the bank account.

A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee owed for the printing of checks, a fee for the handling of a check that was returned because of insufficient funds, a transfer of funds from the bank account to another account at the bank, and so on.

The charge, decrease, or reduction is likely called a debit memo because the checking account balance is a liability on the bank’s books.

This is the case because the bank has your money as one of its assets and it has your account balance as one of its liabilities. When the bank decreases your account balance, it is reducing its liability. Liabilities are reduced with a debit entry. That also explains why the bank credits your account when your account balance is increased.

What Is The Difference Between A Trial Balance And A Balance Sheet?

A trial balance is an internal report that will remain in the accounting department. It is a listing of all of the accounts in the general ledger and their balances. However, the debit balances are entered in one column and the credit balances are entered in another column. Each column is then summed to prove that the total of the debit balances is equal to the total of the credit balances.

A balance sheet is one of the financial statements that will be distributed outside of the accounting department and is often distributed outside of the company. The balance sheet is organized into sections or classifications such as current assets, long-term investments, property, plant and equipment, other assets, current liabilities, long-term liabilities, and stockholders’ equity.

Only the asset, liability, and stockholders’ equity account balances from the general ledger or from the trial balance are then presented in the appropriate section of the balance sheet. Totals are also provided for each section to assist the reader of the balance sheet. The balance sheet is also referred to as the statement of financial position or the statement of financial condition.

What Is The Meaning Of Debit?

Debit means left or left side. For example, every accounting entry will have a debit and credit amount. The debit amount is usually listed first and will be entered on the left side of the general ledger account indicated. (The credit amount will be entered on the right side of another account.)

The general ledger accounts will have both a debit and credit side, or left and right side. The balance in a general ledger account will be either a debit balance or a credit balance.

Asset accounts, expense accounts, and the owner’s drawing account are expected to have debit balances. These debit balances will be increased when additional debit amounts are entered.

To illustrate the above, let’s assume that a company has cash of $500. The company’s general ledger asset account Cash should indicate a debit balance of $500. If the company receives an additional $200, a debit entry will be made and will result in the Cash account having a debit balance of $700.

Sometimes the word charge is used in place of debit. For example, if a company does advertising of $900, the accountant will charge Advertising Expense for $900. The accepted abbreviation for debit is dr.

Why Is Depreciation On The Income Statement Different From The Depreciation On The Balance Sheet?

Depreciation on the income statement is the amount of depreciation expense that is appropriate for the period of time indicated in the heading of the income statement.

The depreciation reported on the balance sheet is the accumulated or the cumulative total amount of depreciation that has been reported as expense on the income statement from the time the assets were acquired until the date of the balance sheet.

Let’s illustrate the difference with an example. A company has only one depreciable asset that was acquired three years ago at a cost of $120,000. The asset is expected to have a useful life of 10 years and no salvage value.

The company uses straight-line depreciation on its monthly financial statements. In the asset’s 36th month of service, the monthly income statement will report depreciation expense of $1,000.

On the balance sheet dated as of the last day of the 36th month, accumulated depreciation will be reported as $36,000. In the 37th month, the income statement will report $1,000 of depreciation expense. At the end of the 37th month, the balance sheet will report accumulated depreciation of $37,000.

What Is A Trial Balance?

A trial balance is a bookkeeping or accounting report that lists the balances in each of an organization’s general ledger accounts. (Accounts with zero balances will likely be omitted.) The debit balance amounts are listed in a column with the heading “Debit balances” and the credit balance amounts are listed in another column with the heading “Credit balances.” The total of each of these two columns should be identical.

In a manual system a trial balance was commonly prepared by the bookkeeper in order to discover whether math errors and/or some posting errors were made. Today, bookkeeping and accounting software has eliminated those clerical errors. This means that the trial balance is less important for bookkeeping purposes since it is almost certain that the total of the debit and credit columns will be equal.

However, the trial balance continues to be useful for auditors and accountants who wish to show

The general ledger account balances prior to their proposed adjustments,
Their proposed adjustments, and
All of the account balances after the proposed adjustments.
These final balances are known as the adjusted trial balance, and these amounts will be used in the organization’s financial statements.

Neither the unadjusted trial balance nor the adjusted trial balance is a financial statement and neither trial balance is distributed to anyone outside of the accounting and auditing staff. In other words, the trial balance is an internal document.

What Are Reversing Entries And Why Are They Used?

Reversing entries are made on the first day of an accounting period in order to remove certain adjusting entries made in the previous accounting period. Reversing entries are used in order to avoid the double counting of revenues or expenses and to allow for the efficient processing of documents. Reversing entries are most often used with accrual-type adjusting entries.

To illustrate reversing entries, let’s assume that a retailer uses a temporary help service from December 15 – 31. The temp agency will bill the retailer on January 10 and the retailer agrees to pay the invoice by January 15. If the retailer’s accounting year ends on

December 31, the retailer will make an accrual-type adjusting entry for the estimated amount. If the estimated amount is $18,000 the retailer will debit Temp Service Expense for $18,000 and will credit Accrued Expenses Payable for $18,000. This adjusting entry assures that the retailer’s income statement and balance sheet as of December 31 will include the temp service expense and obligation.

On January 1, the retailer enters the following reversing entry: debit Accrued Expenses Payable for $18,000 and credit Temp Service Expense for $18,000. When the actual invoice arrives from the temp agency on January 11, the retailer can simply debit the invoice amount to Temp Service Expense.

If the invoice is $18,000 the Temp Service Expense will show $0. (The credit from the reversing entry and the debit from the invoice entry.) Thanks to the reversing entry, the retailer did not have to stop and consider whether the invoice amount pertains to December or January.

If the invoice amount is $18,180 the entire amount is debited to Temp Service Expense and $180 will appear as a January expense. This insignificant amount is acceptable since the adjusting entry amount was an estimate.

What Is The Meaning Of Net Assets?

Net assets is defined as total assets minus total liabilities. In a sole proprietorship the amount of net assets is reported as owner’s equity. In a corporation the amount of net assets is reported as stockholders’ equity.

In a not-for-profit (NFP) organization the amount of total assets minus total liabilities is actually reported as net assets in its statement of financial position. The net asset section for the NFP organization is divided into three classifications:

unrestricted net assets
temporarily restricted net assets
permanently restricted net assets.
The changes in these net asset classifications are reported in the organization’s statement of activities.

What Is Deferred Revenue?

Deferred revenue is not yet revenue. It is an amount that was received by a company in advance of earning it. The amount unearned (and therefore deferred) as of the date of the financial statements should be reported as a liability. The title of the liability account might be Unearned Revenues or Deferred Revenues.

When the deferred revenue becomes earned, an adjusting entry is prepared that will debit the Unearned Revenues or Deferred Revenues account and will credit Sales Revenues or Service Revenues.

What Are Adjusting Entries?

Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that the financial statements reflect the revenues that have been earned and the expenses that were incurred during the accounting period.

Sometimes an adjusting entry is needed because:

revenue has been earned, but it has not yet been recorded.
an expense may have been incurred, but it hasn’t yet been recorded.
a company may have paid for six-months of insurance coverage, but the accounting period is only one month. (This means that five months of insurance expense is prepaid and should not be reported as an expense on the current income statement.)
a customer paid a company in advance of receiving goods or services. Until the goods or services are delivered, the amount is reported as a liability. After the goods or services are delivered, an entry is needed to reduce the liability and to report the revenues.
A common characteristic of an adjusting entry is that it will involve one income statement account and one balance sheet account. (The purpose of each adjusting entry is to get both the income statement and the balance sheet to be accurate.)

What Is A Journal?

In accounting and bookkeeping, a journal is a record of financial transactions in order by date. A journal is often defined as the book of original entry.

The definition was more appropriate when transactions were written in a journal prior to manually posting them to the accounts in the general ledger or subsidiary ledger. Manual systems usually had a variety of journals such as a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and a general journal.

With today’s computerized bookkeeping and accounting, it is likely to find only a general journal in which adjusting entries and unique financial transactions are entered.

The recording and posting of most transactions will occur automatically when sales and vendor invoice information is entered, checks are written, etc. In other words, accounting software has eliminated the need to first record routine transactions into a journal.

When Do You Put Parentheses ( ) Around A Number?

Parentheses around numbers could have a variety of meanings. Here are a few that come to mind.

An amount in parentheses could indicate a negative amount, such as a negative balance in your check register.
Sometimes an amount in parentheses signifies a credit balance in an account normally having a debit balance, or even a debit balance in an account that normally has a credit balance.
Some accountants use the parentheses to simply indicate credit entries. Amounts without parentheses are debit entries.
In standard costing, the variances that are unfavorable are often shown in parentheses. Favorable variances are presented as amounts without parentheses.
In comparisons of actual expenses to budgeted expenses, the amount overspent is often shown in parentheses. Amounts that are underspent appear without parentheses. Similar to variances in standard costing, the parentheses represents unfavorable amounts.
Sometimes parentheses are used to indicate that the amount is to be subtracted.
The bottom line of a comparative income statement (an income statement that reports several years) might read Net Income (Loss). In this case an amount in parentheses indicates a net loss—meaning that expenses exceeded revenues. The amounts on this line that are not in parentheses indicate a positive net income—meaning that revenues exceeded expenses.
I am certain there are other uses of parentheses as well.

What Is A Nominal Account In Accounting?

Nominal accounts in accounting are the temporary accounts, such as the income statement accounts. In other words, nominal accounts are the accounts that report revenues, expenses, gains, and losses. (The owner’s drawing account is also a temporary account, even though it is not an income statement account.)

Nominal or temporary accounts are closed at the end of each accounting year. This means that their account balances are transferred to a permanent account. This closing process allows the nominal accounts to start the next accounting year with zero balances.

The balances from the income statement accounts will end up in the owner’s equity account, if the enterprise is a sole proprietorship. If the business is a corporation, the balances will end up in the retained earnings account.

What Is The Difference Between Accounts Payable And Accrued Expenses Payable?

I would use the liability account Accounts Payable for suppliers’ invoices that have been received and must be paid. As a result, the balance in Accounts Payable is likely to be a precise amount that agrees with supporting documents such as invoices, agreements, etc.

I would use the liability account Accrued Expenses Payable for the accrual type adjusting entries made at the end of the accounting period for items such as utilities, interest, wages, and so on.

The balance in the Accrued Expenses Payable should be the total of the expenses that were incurred as of the date of the balance sheet, but were not entered into the accounts because an invoice has not been received or the payroll for the hourly wages has not yet been processed, etc. The amounts recorded in Accrued Expenses Payable will often be estimated amounts supported by logical calculations.

What Is Accumulated Depreciation?

Accumulated depreciation is the total amount of a plant asset’s cost that has been allocated to depreciation expense since the asset was put into service. Accumulated depreciation is associated with constructed assets such as buildings, machinery, office equipment, furniture, fixtures, vehicles, etc.

Accumulated Depreciation is also the title of the contra asset account which is credited when Depreciation Expense is recorded each accounting period.

The amount of accumulated depreciation is used to determine a plant asset’s book value (or carrying value). For example, a delivery truck having a cost of $50,000 and accumulated depreciation of $31,000 will have a book value of $19,000. (It is important to note that an asset’s book value does not indicate the asset’s market value since depreciation is merely an allocation technique.)

The accumulated depreciation of each plant asset cannot exceed the asset’s cost. If an asset remains in use after its cost has been fully depreciated, the asset’s cost and its accumulated depreciation will remain in the general ledger accounts and the depreciation expense stops.

When the asset is disposed (sold, retired, etc.) the asset’s cost and accumulated depreciation are removed from the accounts.

What Is Miscellaneous Expense?

Miscellaneous expense is often a general ledger account in which very small amounts are recorded. Generally it is best not to use this account.

If another account does not seem appropriate, consider opening a new account to capture the expenses. For example, a $10 donation would be better recorded in an account Donations rather than in Miscellaneous Expense. Checking account fees would be better recorded in Bank Service Charges rather than Miscellaneous Expense.

Miscellaneous expense could also be a line on the income statement that reports the amounts from many general ledger accounts whose balances are not significant. For example, the balances in Cash Short and Over, Bank Service Charges, and Donations might be combined into one amount and presented on the income statement as Miscellaneous Expense.

What Is A Suspense Account?

A suspense account is an account in the general ledger in which amounts are temporarily recorded. The suspense account is used because the proper account could not be determined at the time that the transaction was recorded.

When the proper account is determined, the amount will be moved from the suspense account to the proper account.