Latest Book Keeping Interview Questions

What Is A General Ledger Account?

A general ledger account is an account or record used to sort and store balance sheet and income statement transactions. Examples of general ledger accounts include the asset accounts such as Cash, Accounts Receivable, Inventory, Investments, Land, and Equipment.

Examples of the general ledger liability accounts include Notes Payable, Accounts Payable, Accrued Expenses Payable, and Customer Deposits. Examples of income statement accounts found in the general ledger include Sales, Service Fee Revenues, Salaries Expense, Rent Expense, Advertising Expense, Interest Expense, and Loss on Disposal of Assets.

Some general ledger accounts are summary records which are referred to as control accounts. The detail that supports each of the control accounts will be found outside of the general ledger in what is known as a subsidiary ledger.

For example, Accounts Receivable could be a control account in the general ledger, and there will be a subsidiary ledger which contains each customer’s credit activity. The general ledger accounts Inventory, Equipment, and Accounts Payable could also be control accounts and for each there will be a subsidiary ledger containing the supporting detail.

What Is The Difference Between Accounts Payable And Accounts Receivable?

Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities. Accounts receivable are assets.

Let’s assume that Company A sells merchandise to Company B on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company A will record a sale and will also record an account receivable. Company B will record the purchase (perhaps as inventory) and will also record an account payable.

What Is The Difference Between Wages And Salary?

You should be aware that some people use the terms wages and salary interchangeably. I and many others make the following distinction.

Wages is best associated with employee compensation based on the number of hours worked multiplied by an hourly rate of pay. For example, an employee working in an assembly plant might work 40 hours during the work week. If the person’s hourly rate of pay is $15, the employee will receive a paycheck showing gross wages of $600 (40 x $15).

If the employee had worked only 30 hours during that week, her or his paycheck will show gross wages of $450 (30 x $15). Because the paycheck needs to be computed based on the actual hours worked, the employee earning wages will likely receive her or his paycheck five days after the work period.

Salary is best associated with employee compensation quoted on an annual basis. For example, the manager of the assembly plan might earn a salary of $120,000 per year. If the salaried manager is paid semi-monthly (perhaps on the 15th and last day of each month), her or his paycheck will show gross salary of $5,000 for the half-month.

Since the salary is the same amount for each pay period, the salaried employee’s paycheck will likely cover the work period through the date of the paycheck.

What Is The Significance Of Fob Shipping Point And Fob Destination?

Accountants report a merchandiser’s and a manufacturer’s revenues when a sale is made. The term, FOB Shipping Point, indicates that the sale occurred at the shipping point—at the seller’s shipping dock. FOB Destination indicates that the sale will occur when it arrives at the destination—at the buyer’s receiving dock.

Accountants also assume that the cost of transporting the goods corresponds to these terms. If the sale occurred at the shipping point (seller’s shipping dock), then the buyer should take responsibility for the cost of transporting the goods. (The buyer will record this cost as Freight-In or Transportation-In.)

If the sale doesn’t occur until the goods reach the destination (terms are FOB Destination), then the seller should be responsible for transporting the goods until they reach the buyer’s unloading dock. (The seller will record the transportation cost as Freight-Out, Transportation-Out, or Delivery Expense.)

What Are Accruals?

Accruals are adjustments for 1) revenues that have been earned but are not yet recorded in the accounts, and 2) expenses that have been incurred but are not yet recorded in the accounts. The accruals need to be added via adjusting entries so that the financial statements report these amounts.

An example of an accrual for revenue involves your electric utility company. The utility used coal and many employees in December to generate electricity that customers received in December.

However, the utility doesn’t bill the electric customers for the December electricity until the meters are read in January. To have the proper amounts on the utility’s financial statements, there needs to be an adjusting entry to increase revenues that were earned in December and the receivables that the utility has a right to as of December 31.

Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant’s general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to the preparation of the financial statements.

Here is an example. A company borrowed $200,000 on December 1. The agreement requires that the $200,000 be repaid on February 28 along with $6,000 of interest for the three months of December through February.

As of December 31 the company will not have an invoice or payment for the interest that the company is incurring. (The reason is that all of the interest will be due on February 28.)

Without an adjusting entry to accrue the interest expense that the company has incurred in December, the company’s financial statements as of December 31 will not be reporting the $2,000 of interest (one-third of the $6,000) that the company has incurred in December.

In order for the financial statements to be correct on the accrual basis of accounting, the accountant needs to record an adjusting entry dated as of December 31. The adjusting entry will consist of a debit of $2,000 to Interest Expense (an income statement account) and a credit of $2,000 to Interest Payable (a balance sheet account).

What Is The Cost Of Sales?

Cost of sales is the caption commonly used on a manufacturer’s or retailer’s income statement instead of the caption cost of goods sold or cost of products sold.

The cost of sales for a manufacturer is the cost of finished goods in its beginning inventory plus the cost of goods manufactured minus the cost of finished goods in ending inventory.

The cost of sales for a retailer is the cost of merchandise in its beginning inventory plus the net cost of merchandise purchased minus the cost of merchandise in its ending inventory.

The cost of sales does not include selling expenses or general and administrative expenses, which are commonly referred to as SG&A.

What Is The Difference Between Product Costs And Period Costs?

A manufacturer’s product costs are the direct materials, direct labor, and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.)

The product costs of direct materials, direct labor, and manufacturing overhead are also “inventoriable” costs, since these are the necessary costs of manufacturing the products.

Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration.

The period costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period. In addition to the selling and general administrative expenses, most interest expense is a period expense.

What Is Petty Cash?

Petty cash is a small amount of cash on hand that is used for paying small amounts owed, rather than writing a check. Petty cash is also referred to as a petty cash fund. The person responsible for the petty cash is known as the petty cash custodian.

Some examples for using petty cash include the following: paying the postal carrier the 17 cents due on a letter being delivered, reimbursing an employee $9 for supplies purchased, or paying $14 for bakery goods delivered for a company’s early morning meeting.

The amount in a petty cash fund will vary by organization. For some, $50 is adequate. For others, the amount in the petty cash fund will need to be $200.

When the cash in the petty cash fund is low, the petty cash custodian requests a check to be cashed in order to replenish the cash that has been paid out.

What Is The Cost Of Goods Sold?

The cost of goods sold is the cost of the merchandise that a retailer, distributor, or manufacturer has sold.

The cost of goods sold is reported on the income statement and can be considered as an expense of the accounting period. By matching the cost of the goods sold with the revenues from the goods sold, the matching principle of accounting is achieved.

The sales revenues minus the cost of goods sold is gross profit.

Cost of goods sold is calculated in one of two ways. One way is to adjust the cost of the goods purchased or manufactured by the change in inventory of finished goods.

For example, if 1,000 units were purchased or manufactured but inventory increased by 100 units then the cost of 900 units will be the cost of goods sold. If 1,000 units were purchased but the inventory decreased by 100 units then the cost of 1,100 units will be the cost of goods sold.

The second way to calculate the cost of goods sold is to use the following costs: beginning inventory + the cost of goods purchased or manufactured = cost of goods available – ending inventory.

When costs change during the accounting period, a cost flow will have to be assumed. Cost flow assumptions include FIFO, LIFO, and average.

What Is The Difference Between A General Ledger And A General Journal?

Journals are referred to as books of original entry. Accounting entries are recorded in a journal in order by date. A company might use special journals (sales, purchases, cash disbursements, cash receipts), or its accounting software will generate entries for routine transactions, but there will always be a general journal in which to record nonroutine transactions, such as depreciation, bad debts, sale of an asset, etc.

In the general journal you must enter the account to be debited and the account to be credited and the amounts. Once a transaction is recorded in the general journal, the amounts are then posted to the appropriate accounts.

Accounts (such as Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Sales, Telephone Expense, etc.) are contained in the general ledger.

To recap…the general ledger houses the company’s accounts. The general journal is a place to first record an entry before it gets posted to the appropriate accounts.

What Is The Meaning Of Equity?

Equity is used in accounting in several ways. Often the word equity is used when referring to an ownership interest in a business. Examples include stockholders’ equity or owner’s equity.

Occasionally, equity is used to mean the combination of liabilities and owner’s equity. For example, some restate the basic accounting equation Assets = Liabilities + Owner’s Equity to become Assets = Equities.

Equity is also used to indicate an owner’s interest in a personal asset. The owner of a $200,000 house that has an $80,000 mortgage loan is said to have $120,000 of equity in the house.

Outside of accounting, the word equity is also used to indicate fairness or justice.

What Is Meant By Reconciling An Account?

Reconciling an account often means proving or documenting that an account balance is correct. For example, we reconcile the balance in the general ledger account Cash in Checking to the balance shown on the bank statement.

The objective is to report the correct amount in the general ledger account Cash in Checking. You will often need to adjust the general ledger account balance for items appearing on the bank statement that were not entered in the general ledger account.

I recall being asked to reconcile the general ledger account Freight Payable. What I needed to do was provide documentation that the balance in Freight Payable was proper. I proceeded to look at the shipments of recent sales and then determined how much we would be obligated to pay for the freight on those sales.

We then adjusted the balance in Freight Payable to my documented amount. This reconciliation was done to have the correct account balance and to provide the outside auditors with documentation which could easily be reviewed.

I also reconciled the balance in Utilities Payable by computing the daily cost of each utility that the company used. The cost per day was then multiplied by the number of days since the last meter reading date shown on the utility bills already entered in our accounting system.

We then adjusted the Utilities Payable account balance to be equal to the documented amount.

What Is The Purpose Of Control Accounts?

A control account is a summary account in the general ledger. The details that support the balance in the summary account are contained in a subsidiary ledger—a ledger outside of the general ledger.

The purpose of the control account is to keep the general ledger free of details, yet have the correct balance for the financial statements. For example, the Accounts Receivable account in the general ledger could be a control account.

If it were a control account, the company would merely update the account with a few amounts, such as total collections for the day, total sales on account for the day, total returns and allowances for the day, etc.

The details on each customer and each transaction would not be recorded in the Accounts Receivable control account in the general ledger.

Rather, these details of the accounts receivable activity will be in the Accounts Receivable Subsidiary Ledger. This works well because the employees working with the general ledger probably do not need to see the details for every sale or every collection transaction.

However, the sales manager and the credit manager will need to know detailed information on individual customers, including whether a customer recently reduced their account balance. The company can provide these individuals with access to the Accounts Receivable Subsidiary Ledger and can keep the general ledger free of a tremendous amount of detail.

What Is A Journal Entry?

In manual accounting or bookkeeping systems, business transactions are first recorded in a journal…hence the term journal entry.

A manual journal entry that is recorded in a company’s general journal will consist of the following:

the appropriate date
the amount(s) and account(s) that will be debited
the amount(s) and account(s) that will be credited
a short description/memo
a reference such as a check number
These journalized amounts (which will appear in the journal in order by date) are then posted to the accounts in the general ledger.

Today, computerized accounting systems will automatically record most of the business transactions into the general ledger accounts immediately after the software prepares the sales invoices, issues checks to creditors, processes receipts from customers, etc. The result is we will not see journal entries for most of the business transactions.

However, we will need to process some journal entries in order to record transfers between bank accounts and to record adjusting entries. For example, it is likely that at the end of each month there will be a journal entry to record depreciation. (This will include a debit to Depreciation Expense and a credit to Accumulated Depreciation.)

In addition, there will likely be a need for journal entry to accrue interest on a bank loan. (This will include a debit to Interest Expense and a credit to Interest Payable.)

What Is Retained Earnings?

Generally, retained earnings is a corporation’s cumulative earnings since the corporation was formed minus the dividends it has declared since it began. In other words, retained earnings represents the corporation’s cumulative earnings that have not been distributed to its stockholders.

The amount of retained earnings as of a balance sheet’s date is reported as a separate line item in the stockholders’ equity section of the balance sheet.

A negative amount of retained earnings is reported as deficit or accumulated deficit.

What Is The Accounting Journal Entry For Depreciation?

The journal entry for depreciation contains a debit to the income statement account Depreciation Expense and a credit to the balance sheet account Accumulated Depreciation.

The purpose of the journal entry for depreciation is to achieve the matching principle. In each accounting period, part of the cost of certain assets (equipment, building, vehicle) gets moved from the balance sheet to depreciation expense on the income statement so it can be matched with the revenues obtained by using these assets.

The account Accumulated Depreciation is reported under the asset heading of Property, Plant and Equipment. It is also known as a contra asset account because it is an asset account with a credit balance.

Because Accumulated Depreciation is a balance sheet (or real or permanent) account, its balance will carry over to the next accounting period. This means that its credit balance could get as large as the cost of the assets being depreciated.

The income statement account Depreciation Expense is a temporary account. At the end of each year, its balance is transferred out of the account and Depreciation Expense will begin the new year with a zero balance.

It is important to realize that when the depreciation expense entry is recorded, a company’s net income is reduced by the expense, but its cash is not reduced. (Cash would have been reduced when the asset was acquired.) You should also realize that depreciation is an estimate based on the asset’s historical cost (not its replacement cost), its estimated useful life, and its estimated salvage value.

The focus of depreciation is to allocate and match the cost to expense and it is not to provide an estimate of the current value of the asset. As a result, the market value of a one year old computer will likely be less than the remaining amount reported on the balance sheet.

On the other hand, a rental property in a growing area might have a market value that is greater than the remaining amount reported on the balance sheet.

What Is A Credit Memo?

One type of credit memo is issued by a seller in order to reduce the amount that a customer owes from a previously issued sales invoice. For instance, assume that SellerCorp had issued a sales invoice for $800 for 100 units of product that it shipped to BuyerCo at a price of $8 each.

BuyerCo informs SellerCorp that one of the units is defective and SellerCorp issues a credit memo for $8. The credit memo will cause the following in SellerCorp’s accounting records: 1) a debit of $8 to Sales Returns and Allowances, and 2) a credit of $8 to Accounts Receivable.

In other words, the credit memo reduced SellerCorp’s net sales and its accounts receivable. When BuyerCo records the credit memo, the following will occur in its accounting records: 1) a debit of $8 to Accounts Payable, and 2) a credit of $8 to Purchases Returns and Allowances (or Inventory).

Another type of credit memo, also referred to as a credit memorandum, is issued by a bank when it increases a depositor’s checking account for a certain transaction.

What Are Prepaid Expenses?

Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired.

The amount of prepaid expenses that have not yet expired are reported on a company’s balance sheet as an asset. As the amount expires, the asset is reduced and an expense is recorded for the amount of the reduction.

Hence, the balance sheet reports the unexpired costs and the income statement reports the expired costs. The amount reported on the income statement should be the amount that pertains to the time interval shown in the statement’s heading.

A common prepaid expense is the six-month premium for insurance on a company’s vehicles. Since the insurance company requires payment in advance, the amount paid is often recorded in the current asset account Prepaid Insurance.

If the company issues monthly financial statements, its income statement will report Insurance Expense that is one-sixth of the amount paid. The balance in the account Prepaid Insurance will be reduced by the amount that was debited to Insurance Expense.

What Is A Contra Asset Account?

A contra asset account is an asset account where the balance will be either a credit balance or a zero balance. (A debit balance in a contra asset account will violate the cost principle.) Since a credit balance in an asset account is contrary to the normal or expected debit balance the account is referred to as a contra asset account.

The most common contra asset account is Accumulated Depreciation. Accumulated Depreciation is associated with property, plant and equipment and it is credited when Depreciation Expense is recorded.

Recording the credits in the Accumulated Depreciation means that the cost of the property, plant and equipment will continue to be reported. Reporting the accumulated depreciation separately allows the readers of the balance sheet to see how much of the cost has been depreciated and how much has not yet been depreciated.

Another contra asset account is Allowance for Doubtful Accounts. This account appears next to the current asset Accounts Receivable. The account Allowance for Doubtful Account is credited when a company enters estimated amounts as debits to Bad Debts Expense under the allowance method.

The use of Allowance for Doubtful Accounts permits a reader to see the documented amounts in Accounts Receivable that the company has a right to collect from its credit customers. The separate credit balance in the account Allowance for Doubtful Accounts tells the reader how much of the debit balance in Accounts Receivable is unlikely to be collected.

A less common example of a contra asset account is Discount on Notes Receivable. The credit balance in this account is amortized or allocated to Interest Income or Interest Revenue over the life of a note receivable.

What Is The Three-way Match?

In accounting, the three-way match refers to a procedure used when processing an invoice received from a vendor or supplier. The purpose of the three-way match is to avoid paying incorrect and perhaps fraudulent invoices.

Three-way refers to the three documents involved:

Vendor’s invoice which was received and will become part of an organization’s accounts payable if approved.
Purchase order that was prepared by the organization.
Receiving report that was prepared by the organization.
Match refers to the comparison of the quantities, price per unit, terms, etc. appearing on the vendor’s invoice to the information on the purchase order and to the quantities actually received.

After the vendor’s invoice has been validated by the three-way match, it can be further processed for payment. The three-way match is an important step in safeguarding an organization’s assets.