Top 50 Accounting Interview Questions and Answers

Top 50 Accounting Interview Questions and Answers

Are you preparing for an accounting job interview and wondering what questions you might face? Look no further. We’ve compiled the top 50 accounting interview questions and answers to help you showcase your knowledge and land your dream job.

“The key to acing an accounting interview is being able to explain the ‘why’ behind the numbers, not just recite formulas,” says Jappreet Sethi, a renowned leadership coach. “Interviewers want to see that you have a deep understanding of accounting principles and can apply them to real-world situations.”

Sethi also advises, “Practice your answers out loud, focusing on speaking clearly and confidently. Be ready with examples from your coursework or internships that demonstrate your accounting knowledge in action.”

From basic concepts like the accounting equation to more complex topics like deferred taxes and lease accounting, we’ll cover the most common questions asked in accounting interviews. We’ll also share tips from hiring managers on how to stand out from the competition. By the end of this guide, you’ll be well-prepared to impress your interviewer and take the next step in your accounting career.

So let’s dive in and explore these top 50 accounting interview questions and answers.

What are the three main financial statements?

The three main financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. The Income Statement shows a company’s revenues and expenses. The Balance Sheet shows a company’s assets, liabilities, and shareholders’ equity. The Cash Flow Statement shows the cash inflows and outflows from operating, investing, and financing activities.

How do the three financial statements link together?

The financial statements are linked as follows: Net Income from the Income Statement flows into Retained Earnings on the Balance Sheet. Changes in Balance Sheet accounts, like Accounts Receivable, show up as changes in Operating Assets and Liabilities on the Cash Flow Statement. The ending Cash balance on the Cash Flow Statement flows into the Cash line on the Balance Sheet.

What is the difference between cash and accrual accounting?

Cash accounting records revenues and expenses only when cash is exchanged. Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash is paid or received. Most companies use accrual accounting as it provides a more accurate picture of financial performance by matching revenues with the expenses incurred to generate those revenues.

What is working capital and how do you calculate it?

Working capital represents the short-term assets a company has available to run its business and pay upcoming expenses. It is calculated as Current Assets minus Current Liabilities. Positive working capital indicates a company has sufficient short-term assets to cover its short-term liabilities. Negative working capital could indicate a company is struggling to meet its short-term obligations.

Explain the difference between accounts receivable and accounts payable.

Accounts Receivable is the money owed to a company by customers who purchased goods or services on credit. It is a current asset on the Balance Sheet. Accounts Payable is the money a company owes to vendors for goods or services purchased on credit. It is a current liability on the Balance Sheet.

How do you calculate the quick ratio? What does it tell you?

The quick ratio measures a company’s ability to meet its short-term obligations using its most liquid assets. It is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. A quick ratio of 1.0 or greater indicates a company has sufficient liquid assets to cover its current liabilities. A ratio below 1.0 could indicate liquidity issues.

What is goodwill and when does it arise?

Goodwill is an intangible asset that arises when one company acquires another for a premium. The amount of goodwill is the difference between the purchase price and the fair market value of the target’s identifiable net assets. Goodwill represents the value of intangible elements of the acquired company, like its brand, customers, intellectual property, etc.

How do you calculate the return on equity ratio?

What does it measure? Return on Equity (ROE) measures the profitability of a company in relation to shareholders’ equity. It is calculated as Net Income / Shareholders’ Equity. ROE shows how much profit a company generates with investors’ money. A higher ROE indicates a company is using its investors’ funds effectively to generate returns.

What does a company’s “gross margin” represent?

Gross margin is a company’s net sales revenue minus its cost of goods sold (COGS). In other words, it’s the amount of money a company retains after incurring the direct costs of producing the goods it sells or providing its services. Gross margin is often expressed as a percentage of net sales and indicates a company’s profitability before overhead expenses.

What steps are involved in the accounting cycle?

The accounting cycle has 6 major steps:

  • Analyze and record transactions
  • Post transactions to the ledger
  • Prepare an unadjusted trial balance
  • Prepare adjusting entries at the end of the period
  • Prepare an adjusted trial balance
  • Prepare financial statements

What is double-entry bookkeeping?

Double-entry bookkeeping is an accounting system where every transaction is recorded in at least two accounts as a debit entry in one account and a credit entry in another account. The sum of all debits must equal the sum of all credits. This system helps identify errors and provides a more complete picture of a company’s finances.

What are some examples of current assets and current liabilities?

Some common current assets include:

  • Cash and cash equivalents
  • Accounts receivable
  • Inventory
  • Prepaid expenses Some common current liabilities include:
  • Accounts payable
  • Wages payable
  • Interest payable
  • Income taxes payable

What is the difference between accounts receivable and notes receivable?

Accounts receivable is money owed by customers for goods or services purchased on open credit. Notes receivable is money owed by customers who have signed a promissory note agreeing to pay back a specific amount by a certain date, usually with interest. Notes receivable are often used for larger, longer-term customer receivables.

What are “prepaid expenses” and how do you record them?

Prepaid expenses are payments made by a company for goods or services that will be received in the near future, such as prepaid rent or insurance. When the payment is made, it is recorded as an asset on the balance sheet in the Prepaid Expenses account. As the good or service is actually received over time, the Prepaid Expense asset is expensed and recorded on the income statement.

What is depreciation? How do you calculate it?

Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It is recorded as an expense each accounting period. The most common depreciation methods are straight-line, double-declining balance, and units of production. For example, using straight-line depreciation, an asset with a useful life of 5 years and a purchase price of $10,000 would be depreciated at $2,000 per year ($10,000 / 5 years).

What is a deferred tax asset or liability and when does it arise?

Deferred tax assets and liabilities arise due to temporary differences between accounting income and taxable income. If a company will pay more taxes in the future because of a transaction that occurred in the current period, it records a deferred tax liability. Conversely, if a company will save on taxes in the future because of a transaction in the current period, it records a deferred tax asset. Some common causes are differences in depreciation methods for accounting vs. tax purposes.

What are the four financial statements? The four main financial statements are:

  • Income Statement – shows revenues, expenses, and profit for a period
  • Balance Sheet – shows a company’s assets, liabilities, and equity at a point in time
  • Cash Flow Statement – shows cash inflows and outflows from operations, investing, and financing
  • Statement of Shareholders’ Equity – shows changes in equity accounts for a period

How do you record a “capital lease” vs an “operating lease”?

Under an operating lease, the lessee records periodic rental payments as an operating expense. The asset remains on the lessor’s books. Under a capital lease, the lessee records the leased property as an asset and the lease payments as a liability on its balance sheet. A capital lease is treated like a purchase of an asset that is financed with debt.

What are some common “non-cash” expenses?

Some common non-cash expenses are:

  • Depreciation and amortization
  • Stock-based compensation
  • Unrealized losses on investments
  • Asset write-downs or impairments.
  • These expenses reduce net income but do not impact cash flow.

What is the difference between direct costs and indirect costs?

Direct costs are expenses that can be directly traced to producing a specific good or service, like direct materials and direct labor. Indirect costs are expenses that cannot be directly tied to a specific product or service but still contribute to a company’s operations, like utilities and rent. Indirect costs are usually allocated to products based on some activity measure.

How do you calculate the debt-to-equity ratio? What does it tell you?

The debt-to-equity (D/E) ratio is calculated as Total Liabilities / Total Shareholders’ Equity. It indicates the relative proportion of a company’s equity and debt used to finance its assets. A high D/E ratio suggests a company has been aggressive in using debt to finance growth. A low D/E ratio indicates a company is using more equity than debt to fund itself. Investors use the D/E ratio to evaluate a company’s financial leverage and risk.

What is the matching principle in accounting?

The matching principle states that expenses should be recorded in the same accounting period as the revenues to which they relate. This ensures that a company’s income statement reports expenses and the revenue generated by those expenses in the same period to give an accurate picture of financial performance. For example, the cost of goods sold should be recorded in the same period that the sale of those goods is recorded as revenue.

How do you calculate the inventory turnover ratio?

Inventory turnover = Cost of Goods Sold / Average Inventory. This ratio measures how many times a company has sold and replaced its inventory during a period. It indicates how quickly a company sells its inventory. A higher ratio is generally better and means a company is selling goods quickly and there is demand for its products. A low ratio could indicate weak sales or obsolete inventory.

Explain the accounting treatment for “bad debt” expense.

When a company determines it will not be able to collect an account receivable, it records a “bad debt” expense. The company credits (reduces) Accounts Receivable and debits (increases) Bad Debt Expense. This follows the matching principle by recording an expense in the same period as the revenue that will not be collected. Companies also maintain an Allowance for Doubtful Accounts contra asset account to estimate bad debts.

What is an adjusting journal entry?

An adjusting journal entry is made at the end of an accounting period to update certain revenue and expense accounts before financial statements are prepared. Common adjusting entries include recording depreciation expense, recording accrued revenue or expenses, adjusting prepaid accounts, and recording inventory changes. Adjusting entries follow the accrual accounting concept by ensuring revenues and expenses are recorded in the correct period.

How do you calculate the price-earnings (P/E) ratio?

The P/E ratio is a company’s stock price divided by its annual earnings per share. It indicates how much investors are willing to pay for each dollar of a company’s earnings. A higher P/E could mean investors expect high earnings growth in the future. The P/E is used to compare companies in the same industry and to determine if a stock is overvalued or undervalued.

What is owner’s equity and how does it change?

Owner’s equity (or shareholders’ equity for a corporation) is the owner’s stake in a company. It’s the residual amount that remains after subtracting a company’s liabilities from its assets. Owner’s equity increases when a company is profitable and the owner leaves money in the business. It decreases if a company loses money or if the owner takes money out of the business in the form of draws or dividends.

What is the difference between a permanent account and a temporary account?

A permanent (or real) account is one that carries a balance from period to period. The ending balance from one period becomes the beginning balance for the next. Examples are asset, liability, and equity accounts. In contrast, a temporary (or nominal) account is one that starts each period with a zero balance and is closed out at the end of the period. Revenue and expense accounts are temporary accounts that are closed to retained earnings each period.

How do you calculate the times interest earned ratio?

The times interest earned ratio measures a company’s ability to meet its debt obligations. It is calculated as Earnings Before Interest and Taxes (EBIT) / Interest Expense. This ratio indicates how many times a company could pay its interest expenses using its pre-tax earnings. A higher times interest earned ratio is better. A ratio below 1.0 could indicate a company is having difficulty generating enough income to pay its interest expenses.

What is the difference between GAAP and IFRS?

Generally Accepted Accounting Principles (GAAP) is the accounting framework used in the United States. International Financial Reporting Standards (IFRS) is an international accounting framework used in many countries around the world. Key differences between GAAP and IFRS include the way inventory is valued (LIFO is allowed under GAAP but not under IFRS), rules around revenue recognition, and the presentation of financial statements.

What are the main differences between a cash flow statement and an income statement?

The income statement shows a company’s revenues, expenses, and profit over a period of time. It follows the accrual concept and includes non-cash items like depreciation. The cash flow statement shows the company’s inflows and outflows of cash. It separates cash flows into operating, investing, and financing activities. The cash flow statement provides insights into a company’s liquidity and its ability to pay short-term obligations.

What does a “common size” financial statement show?

A common size financial statement displays each line item as a percentage of a common figure. For an income statement, it shows each income and expense category as a percent of total revenue. For a balance sheet, it shows each asset, liability and equity account as a percent of total assets. Common size statements make it easy to compare results across periods and between companies of different sizes.

What are some techniques you use to minimize the risk of errors in your accounting work?

Some best practices to mitigate the risk of errors in accounting include:

    • Following a consistent month-end close checklist and process
    • Performing analytical reviews to identify unusual fluctuations
    • Having a peer or manager review your work
    • Reconciling key accounts to supporting schedules regularly
    • Keeping organized and detailed work papers to document how numbers tie out
    • Leveraging system controls and checks where possible
    • Staying up to date on accounting pronouncements and guidance
    • Asking questions when something doesn’t look right
  • How do you calculate the contribution margin ratio?

The contribution margin ratio is (Net Sales – Variable Costs) / Net Sales. This ratio shows the portion of each sales dollar available to cover fixed costs. Put another way, it’s the percent of sales that contributes to covering fixed costs and then to profit. The ratio is used to determine the profitability and break-even point for a product. A higher contribution margin ratio means more of each sales dollar is contributing to profit.

What is absorption costing?

Absorption costing is a method where all manufacturing costs – including fixed manufacturing overhead – are included in the cost of a product. These costs flow through the inventory accounts until the product is sold, at which point they are expensed as cost of goods sold. This differs from variable costing, where fixed manufacturing overhead is expensed in the period incurred and not included in product costs. Absorption costing is required under GAAP for external reporting.

What is the difference between a journal and a ledger?

A journal is the first place a transaction is recorded in the accounting records. Business transactions are recorded in journal entries that show account names and amounts to be debited and credited. The ledger, on the other hand, is where the individual accounts are maintained. The journal entries are analyzed and then transferred to the appropriate accounts in the ledger. The ledger contains the balance and a summary of activity in each account.

How do you calculate the degree of operating leverage?

The degree of operating leverage measures how sensitive a company’s profit is to a change in sales. It’s calculated as the percent change in operating income / percent change in sales. A higher degree of operating leverage means a company’s profits are more sensitive to changes in sales volume. Companies with high fixed costs tend to have higher operating leverage. Knowing the degree of operating leverage helps managers understand profit volatility and risk.

What is the difference between a fixed cost and a variable cost?

A fixed cost is one that does not change as the volume of activity changes. Examples include rent, insurance, and property taxes. Managers can’t influence fixed costs in the short term without making major business changes. A variable cost, on the other hand, varies in direct proportion to the volume of activity. Examples include direct materials, sales commissions, and shipping costs. Managers have more near-term control over variable costs.

What is the difference between a product cost and a period cost?

A product cost is any cost that is involved in purchasing or manufacturing a product. Product costs are viewed as an asset until the products are sold, at which time the costs are expensed as cost of goods sold. Examples are direct materials, direct labor, and manufacturing overhead. Period costs are not directly tied to production and are expensed in the period incurred. Examples are office rent, advertising, and executive salaries.

What does the activity ratio “days sales outstanding” measure?

Days sales outstanding (DSO) measures the average number of days it takes a company to collect revenue after a sale has been made. It is calculated as (Accounts Receivable / Annual Sales) x 365. A lower DSO is generally better and means a company is collecting payments faster. A higher DSO could indicate collection problems or that a company is offering customers generous payment terms. DSO is used to assess the efficiency of a company’s credit and collection policies.

What are the two main inventory costing methods?

The two main inventory costing methods are First-In, First-Out (FIFO) and Last-In, First-Out (LIFO). Under FIFO, the costs of the earliest goods purchased are the first costs expensed as cost of goods sold. Ending inventory reflects the costs of the most recently purchased goods. Under LIFO, the costs of the most recently purchased goods are the first costs expensed as cost of goods sold. Ending inventory reflects the costs of the earliest goods purchased.

Explain the difference between managerial accounting and financial accounting.

Managerial accounting provides information to internal decision makers like managers and executives. It focuses on budgeting, forecasting, cost analysis, and performance measurement to help managers make decisions. Financial accounting, on the other hand, provides information to external stakeholders like investors, creditors, and regulators. It focuses on historical results and the preparation of financial statements in accordance with GAAP. Managerial accounting is forward-looking while financial accounting is backward-looking.

What is a deferred expense?

A deferred expense is a cost that has been paid but not yet consumed. It is initially recorded as an asset on the balance sheet and then expensed over time on the income statement. An example is a company buying an insurance policy and paying for a full year upfront. The payment is initially recorded as a deferred expense asset. Each month, a portion is expensed. This matches the expense to the period when the insurance coverage is provided.

How do you calculate the cash conversion cycle?

The cash conversion cycle (CCC) measures how long it takes a company to convert cash invested in inventory into cash collected from customers. It is calculated as Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding. A lower CCC is better and means a company is managing its working capital effectively. The CCC is useful for assessing a company’s efficiency in managing inventory, collecting receivables, and paying suppliers.

What is the difference between the current ratio and the quick ratio?

Both the current ratio and quick ratio measure a company’s liquidity or ability to meet short-term obligations. The current ratio is calculated as Current Assets / Current Liabilities. It indicates a company’s ability to pay short-term liabilities with short-term assets. The quick ratio is more conservative and is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. The quick ratio excludes inventory and prepaid expenses, which are less liquid current assets.

What is the difference between a bank reconciliation and a proof of cash?

A bank reconciliation compares a company’s records of cash transactions (book balance) with the bank’s records (bank statement balance). Its purpose is to identify any differences between these two sets of records and make necessary adjustments. A proof of cash, on the other hand, is an internal verification of the accuracy of a company’s cash records. It ensures that the beginning cash balance plus receipts minus disbursements equals the ending cash balance. A proof of cash confirms the cash account is in balance.

What is the accounting treatment for a capital lease vs. an operating lease?

Under an operating lease, the lessee records lease payments as a rental expense on its income statement. The leased asset remains on the lessor’s balance sheet. Under a capital lease, the lessee records the leased asset on its balance sheet as if it owns the asset. The lessee also records a corresponding lease liability on its balance sheet. Lease payments are treated as part interest expense and part principal repayment. Capital leases are treated like a purchase of an asset financed with debt.

How do you calculate the debt service coverage ratio?

What does it tell you? The debt service coverage ratio measures a company’s ability to use its operating income to repay all its debt obligations, including repayment of principal and interest. It is calculated as Operating Income / Total Debt Service. Total debt service includes all interest and principal payments to be made in the coming year. A ratio of less than 1 indicates a company does not generate sufficient operating income to cover its debt obligations. Lenders use this ratio to measure a company’s ability to repay its loans.

What is the difference between a debit and a credit?

In double-entry bookkeeping, a debit entry records an increase in assets or expenses, or a decrease in liabilities, revenue or equity. A credit entry records a decrease in assets or expenses, or an increase in liabilities, revenue or equity. In the accounting equation, Assets = Liabilities + Equity, debits increase asset accounts and credits increase liability and equity accounts. In the expanded equation, Assets + Expenses = Liabilities + Equity + Revenue, debits also increase expense accounts and credits also increase revenue accounts.

How do you handle a situation where you disagree with your manager or a client about an accounting treatment?

If I disagree with the accounting treatment proposed by my manager or client, my approach would be:

  1. First, to make sure I fully understand their position and reasoning. I would ask clarifying questions.
  2. Then, I would do my own research on the relevant accounting standards and guidance. I would look at regulations, accounting bulletins, and industry practices.
  3. I would organize my findings and outline my position in a clear, logical way, supported by facts and authoritative sources.
  4. I would then have a respectful discussion with my manager or client. I would present my view objectively, listen to their perspective, and aim to reach a consensus.
    If we still disagree, I would suggest we consult with a technical accounting expert or, if needed, our auditors to get an objective third-party view.
  5. Throughout the process, I would maintain my integrity and commitment to following proper accounting principles. I would not sign off on a treatment I believed was wrong. At the same time, I would work to maintain positive relationships and keep communication channels open.

Thorough preparation is key to acing any accounting interview. By studying common accounting concepts and practicing your answers to these top 50 questions, you’ll be well on your way to demonstrating your accounting knowledge and impressing your interviewer. Remember, the key is to understand the “why” behind the accounting, not just the “how”.

Be ready to explain your thought process and rationale. With the right preparation and a positive attitude, you’ll be set to land your dream accounting job. Good luck!

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