Basic Accounting 100 FAQs

This foundational knowledge is essential for students who are new to the subject, allowing them to build a solid ground before delving deeper into advanced concepts. For researchers, having access to accurate and straightforward answers can facilitate more effective analysis and interpretation of financial data. Ultimately, basic accounting FAQs empower learners and professionals alike to navigate the intricate world of finance with confidence, ensuring they possess the necessary tools to succeed in their academic and professional endeavors.

Basic Accounting 100 FAQs

Basic accounting FAQs are essential for students and researchers as they provide foundational knowledge that is crucial for understanding financial principles. These questions cover topics such as financial statements, budgeting, and the accounting cycle, making complex concepts accessible. For students, mastering these basics enhances their academic performance and prepares them for real-world applications in various fields, including business and finance. Researchers benefit by gaining insights into data interpretation and financial analysis, which are vital for conducting thorough and credible studies. Furthermore, a solid grasp of basic accounting fosters critical thinking, helping individuals make informed decisions in both personal and professional contexts. Overall, these FAQs serve as a valuable resource for anyone looking to navigate the world of accounting effectively.

1. General Accounting Basics

What is accounting?
The process of recording, summarizing, and reporting financial transactions.
Why is accounting important?
It helps in decision-making, tracking finances, and ensuring legal compliance.
What are the main types of accounting?
Financial, managerial, cost, tax, and forensic accounting.
What is the accounting cycle?
The sequence of steps to record, process, and report financial transactions.
What are Generally Accepted Accounting Principles (GAAP)?
Standard rules for financial reporting.
What is the difference between accounting and bookkeeping?
Bookkeeping records transactions; accounting analyzes and reports them.
What is financial accounting?
Preparing financial statements for external users.
What is managerial accounting?
Providing financial data for internal decision-making.
What is forensic accounting?
Investigating financial fraud or disputes.
What are the main objectives of accounting?
To track, report, and analyze financial data.

2. Key Accounting Concepts

What is the accounting equation?
Assets = Liabilities + Equity.
Why is the accounting equation important?
It shows the financial position of a business.
What are debits and credits?
Entries in accounts: debits increase assets; credits increase liabilities or equity.
What is the double-entry system?
Each transaction affects two accounts, keeping the equation balanced.
What are assets?
Resources owned by a business (e.g., cash, equipment).
What are liabilities?
Obligations a business owes (e.g., loans, accounts payable).
What is equity?
The owner’s claim on business assets after liabilities.
What is revenue?
Income earned from business operations.
What is an expense?
Costs incurred to generate revenue.
What is a journal entry?
A record of a business transaction in the accounting system.

3. Financial Statements

What are the main financial statements?
Balance sheet, income statement, cash flow statement, and statement of equity.
What is a balance sheet?
A snapshot of a company’s assets, liabilities, and equity at a point in time.
What is an income statement?
A report showing revenues, expenses, and profits over a period.
What is a cash flow statement?
A statement showing cash inflows and outflows.
What is the statement of owner’s equity?
A report showing changes in equity during a period.
How do financial statements interconnect?
Net income links the income statement to the balance sheet and cash flow.
What is a fiscal year?
A 12-month accounting period not necessarily aligned with the calendar year.
What is a trial balance?
A report ensuring total debits equal total credits.
Why are financial statements important?
They provide a summary of financial health for decision-making.
What is a comparative financial statement?
Financial statements showing figures for multiple periods.

4. Accounts and Ledgers

What is an account?
A record summarizing all transactions for a specific category.
What is a ledger?
A book or system that contains all accounts.
What is the general ledger?
A comprehensive ledger summarizing all accounts.
What is a subsidiary ledger?
A detailed ledger supporting a general ledger account.
What is a chart of accounts?
A list of all accounts used in the accounting system.
What is accounts payable?
Money owed by a business to suppliers.
What is accounts receivable?
Money owed to a business by customers.
What is a T-account?
A visual representation of an account showing debits and credits.
What is a contra account?
An account that reduces a related account, e.g., accumulated depreciation.
What is the purpose of a trial balance?
To ensure debits equal credits before preparing financial statements.

5. Cash and Banking

What is petty cash?
A small amount of cash kept on hand for minor expenses.
What is a bank reconciliation?
Comparing the bank statement to the company’s records to ensure accuracy.
What is cash accounting?
Recording transactions when cash is received or paid.
What is accrual accounting?
Recording revenues and expenses when they are earned or incurred.
What is a cash flow statement?
A report showing the cash inflows and outflows during a period.
What are outstanding checks?
Checks issued but not yet cleared by the bank.
What are deposits in transit?
Deposits made but not yet recorded by the bank.
What is the imprest system?
A method to manage petty cash with a fixed amount.
What is the difference between cash and profit?
Cash refers to liquid funds, while profit is revenue minus expenses.
Why is cash flow important?
It ensures a business can meet its short-term obligations.

6. Payroll and Taxes

What is payroll accounting?
Recording and managing employee wages, deductions, and taxes.
What are payroll taxes?
Taxes employers withhold from employee wages and pay to the government.
What is gross pay?
The total earnings of an employee before deductions.
What is net pay?
The amount an employee takes home after deductions.
What is a W-2 form?
A form showing employee earnings and tax deductions for a year.
What is a W-4 form?
A form employees fill to determine tax withholding.
What is withholding tax?
Income tax withheld by employers from employee wages.
What is FICA?
Federal Insurance Contributions Act tax for Social Security and Medicare.
What is a payroll journal entry?
An entry recording wages, deductions, and employer tax expenses.
What is a tax liability?
The total taxes owed to the government.

7. Inventory and Costing

What is inventory?
Goods a company holds for sale or production.
What is the cost of goods sold (COGS)?
The direct cost of goods sold during a period.
What is FIFO?
First-In, First-Out: oldest inventory sold first.
What is LIFO?
Last-In, First-Out: newest inventory sold first.
What is weighted average cost?
The average cost of all inventory items.
What is perpetual inventory?
A system updating inventory records continuously.
What is periodic inventory?
A system updating inventory at set intervals.
What is inventory turnover?
A ratio showing how often inventory is sold in a period.
What are inventory adjustments?
Changes made to inventory records due to errors or theft.
What is shrinkage?
Loss of inventory due to theft, damage, or errors.

8. Depreciation and Fixed Assets

What is depreciation?
Allocating the cost of a fixed asset over its useful life.
What are fixed assets?
Long-term tangible assets used in operations (e.g., machinery).
What is accumulated depreciation?
The total depreciation charged on an asset over time.
What is straight-line depreciation?
Spreading an asset’s cost evenly over its useful life.
What is declining balance depreciation?
Depreciating an asset by a fixed percentage each year.
What is salvage value?
The estimated value of an asset at the end of its useful life.
What is an intangible asset?
A non-physical asset, such as patents or goodwill.
What is amortization?
Spreading the cost of intangible assets over time.
What is capital expenditure?
Money spent on acquiring or upgrading fixed assets.
What is impairment?
A reduction in the recoverable value of an asset.

9. Ratios and Analysis

What is financial analysis?
Evaluating a company’s financial data to assess performance.
What is a liquidity ratio?
Measures a company’s ability to meet short-term obligations.
What is a profitability ratio?
Measures a company’s ability to generate profit.
What is a solvency ratio?
Measures a company’s long-term financial stability.
What is the current ratio?
Current assets divided by current liabilities.
What is the debt-to-equity ratio?
Total liabilities divided by equity.
What is the gross profit margin?
Gross profit divided by revenue.
What is return on equity (ROE)?
Net income divided by shareholders’ equity.
What is return on assets (ROA)?
Net income divided by total assets.
What is break-even analysis?
Determining when revenue equals total costs.

10. Miscellaneous Accounting Topics

What is accrual?
Recording revenue or expenses when incurred, not when cash is exchanged.
What is a prepaid expense?
An expense paid in advance (e.g., insurance).
What is deferred revenue?
Money received before delivering goods or services.
What is a contingent liability?
A potential obligation depending on future events.
What is a provision?
An estimated liability recognized in the accounts.
What is goodwill?
The value of a business above its net assets.
What is a journal voucher?
A document used to record transactions in the journal.
What is materiality?
The significance of an item’s impact on financial statements.
What is reconciliation?
Matching records to ensure accuracy and consistency.
What is an audit?
A review of financial records to ensure accuracy and compliance.

Basic Accounting 100 FAQs