Question 1: What is the difference between the cash basis and accrual basis of accounting?
Answer: The cash basis of accounting records revenues and expenses when cash is received or paid, while the accrual basis records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.

Question 2: What is the accounting equation?
Answer: The accounting equation is Assets = Liabilities + Equity, which shows the relationship between a company’s assets, the claims against those assets (liabilities), and the owner’s equity in the business.

Question 3: Define accounts receivable.
Answer: Accounts receivable represents the amount of money owed to a company for goods or services it has provided to customers on credit.

Question 4: What is the purpose of a trial balance?
Answer: A trial balance is a list of all the general ledger accounts that a company uses, along with their respective debit or credit balances. Its purpose is to ensure that the total debits equal the total credits, thus ensuring the accuracy of the accounting records.

Question 5: Explain the concept of depreciation.
Answer: Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It recognizes that assets lose value over time due to wear and tear, obsolescence, or other factors.

Question 6: What is the difference between a current asset and a fixed asset?
Answer: A current asset is an asset that is expected to be converted into cash or used up within one year, whereas a fixed asset is a long-term asset that is not intended for sale, such as buildings, machinery, or land.

Question 7: Define accounts payable.
Answer: Accounts payable represents the amount of money a company owes to its suppliers or vendors for goods or services received on credit.

Question 8: What are accruals?
Answer: Accruals are revenues or expenses that have been earned or incurred but have not yet been recorded in the accounts because they have not been paid or received.

Question 9: Explain the concept of a general ledger.
Answer: The general ledger is a complete record of all the accounts and their balances of a company. It serves as the central repository for all financial transactions and is used to prepare financial statements.

Question 10: What is the purpose of the Income Statement?
Answer: The Income Statement, also known as the Profit and Loss Statement, shows the revenues, expenses, and net income or loss of a company over a specific period. It provides an overview of the company’s profitability.

Question 11: Define retained earnings.
Answer: Retained earnings represent the portion of a company’s net income that is retained in the business rather than distributed to shareholders as dividends. It contributes to the company’s overall equity.

Question 12: What are the three main financial statements?
Answer: The three main financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. These statements provide a comprehensive overview of a company’s financial performance and position.

Question 13: What is the purpose of the Balance Sheet?
Answer: The Balance Sheet provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity, and helps determine its solvency and liquidity.

Question 14: Define goodwill.
Answer: Goodwill is an intangible asset that arises when one company acquires another at a price higher than the fair value of its identifiable net assets. It represents the value of the acquired company’s reputation, customer base, and other intangible factors.

Question 15: What is the role of a journal entry?
Answer: A journal entry is used to record individual transactions or events in an accounting system. It captures the debit and credit aspects of each transaction and forms the basis for posting to the general ledger.

Question 16: Explain the concept of double-entry accounting.
Answer: Double-entry accounting is a system in which every financial transaction is recorded with at least two entries: a debit and a credit. This ensures that the accounting equation remains in balance and provides a comprehensive record of the transaction.

Question 17: Define working capital.
Answer: Working capital represents the difference between a company’s current assets and its current liabilities. It measures a company’s short-term liquidity and its ability to meet its operational needs.

Question 18: What is the difference between a liability and an expense?
Answer: A liability is a financial obligation or debt that a company owes to another party, while an expense is a cost incurred by a company in its normal course of business.

Question 19: Explain the concept of a bank reconciliation.
Answer: A bank reconciliation is the process of comparing the balances in a company’s accounting records with the balances shown on its bank statement. It helps identify any discrepancies or errors and ensures that the company’s records align with the bank’s records.

Question 20: Define cost of goods sold (COGS).
Answer: Cost of goods sold refers to the direct costs incurred by a company in producing or acquiring the goods or services it sells. It includes the cost of raw materials, direct labor, and any overhead costs directly attributable to the production process.

1. What is the difference between cash basis accounting and accrual basis accounting?
Answer: Cash basis accounting records transactions when cash is received or paid, while accrual basis accounting records transactions when they occur, regardless of cash flow.

2. Explain the concept of goodwill in accounting.
Answer: Goodwill represents the intangible value of a business, such as its reputation, customer loyalty, and brand recognition. It is recorded as an asset when a company acquires another company for more than the fair market value of its net assets.

3. How is revenue recognized in accrual accounting?
Answer: Revenue is recognized when it is earned and realizable, regardless of whether cash has been received. It follows the revenue recognition principle which requires revenue to be recorded when goods or services are provided to customers.

4. What is the purpose of the adjusted trial balance?
Answer: The adjusted trial balance is prepared after adjusting entries have been made at the end of an accounting period. Its purpose is to ensure that the total debits equal the total credits and to present accurate financial statements.

5. How do you calculate depreciation expense?
Answer: Depreciation expense is calculated using various methods such as straight-line, declining balance, or units-of-production. The formula for straight-line depreciation is (Asset Cost – Salvage Value) / Useful Life.

6. What is the difference between accounts payable and accounts receivable?
Answer: Accounts payable represents money owed by a company to its suppliers or creditors, while accounts receivable represents money owed to a company by its customers or debtors.

7. Explain the concept of a contingent liability.
Answer: A contingent liability is a potential liability that depends on a future event. It is disclosed in the notes to the financial statements if the likelihood of occurrence and amount can be reasonably estimated.

8. How does the matching principle relate to expense recognition?
Answer: The matching principle states that expenses should be recognized in the same period as the revenues they help generate. This principle ensures that financial statements accurately reflect the economic reality of a business.

9. What is the purpose of the statement of cash flows?
Answer: The statement of cash flows provides information about the cash inflows and outflows from operating, investing, and financing activities. It helps users understand a company’s ability to generate cash and its liquidity.

10. How do you account for the issuance of a bond?
Answer: When a company issues a bond, it records a liability for the bond payable and records the cash received as a debit. Over time, the company recognizes interest expense and decreases the liability through amortization.

11. Explain the concept of present value in accounting.
Answer: Present value is the current value of a future cash flow discounted at an appropriate interest rate. It is used to determine the fair value of assets or liabilities that involve future cash flows.

12. How is inventory valued in accounting?
Answer: Inventory can be valued using various methods such as first-in-first-out (FIFO), last-in-first-out (LIFO), or weighted average cost. The chosen method impacts the cost of goods sold and the value of ending inventory.

13. What is the purpose of the statement of retained earnings?
Answer: The statement of retained earnings shows the changes in a company’s retained earnings account over a specific period. It reconciles the beginning and ending retained earnings and includes any adjustments, dividends, or net income.

14. How do you calculate return on investment (ROI)?
Answer: ROI is calculated by dividing the net income from an investment by the initial investment cost and expressing it as a percentage. The formula is (Net Income / Initial Investment) x 100.

15. Explain the concept of share capital.
Answer: Share capital represents the equity invested by shareholders in a company. It is the total value of shares issued by the company to its owners in exchange for ownership rights.

16. What are the main financial statements and their purposes?
Answer: The main financial statements are the balance sheet (reports assets, liabilities, and equity), the income statement (reports revenue and expenses), and the statement of cash flows (reports cash inflows and outflows).

17. What is meant by the matching concept in accounting?
Answer: The matching concept states that expenses should be recorded in the same accounting period as the related revenues. This principle ensures that financial statements accurately represent the results of operations.

18. What is the purpose of the statement of comprehensive income?
Answer: The statement of comprehensive income reports the financial performance of a company over a specific period, including both net income and other comprehensive income. It provides a more complete picture of financial performance.

19. How do you calculate the earnings per share (EPS)?
Answer: EPS is calculated by dividing the net income available to common shareholders by the weighted average number of common shares outstanding. The formula is (Net Income – Preferred Dividends) / Weighted Average Common Shares.

20. Explain the concept of equity method of accounting for investments.
Answer: The equity method is used to account for investments in which the investor has significant influence over the investee (typically ownership of 20-50%). The investor records its share of the investee’s net income or loss as an increase or decrease in the investment’s carrying value.