Basic Accounting 100 FAQs Plus

Basic Accounting 100 FAQs Plus

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

1. What is accounting?
   Accounting is the process of recording, summarizing, and reporting financial transactions of a business to provide useful financial information to stakeholders.

2. Why is accounting important?
   Accounting tracks financial health, aids in decision-making, ensures tax compliance, and attracts investors.

3. What are the main types of accounting?

   • Financial Accounting: Prepares reports for external stakeholders.

   • Managerial Accounting: Focuses on internal decision-making.

   • Cost Accounting: Analyzes production costs.

   • Tax Accounting: Manages tax compliance and planning.

   • Forensic Accounting: Investigates fraud or disputes.

4. What is the accounting cycle?
   A series of steps that include identifying, recording, summarizing, and reporting financial transactions within an accounting period.

5. What are Generally Accepted Accounting Principles (GAAP)?
   A framework of rules and guidelines for financial accounting and reporting to ensure consistency and reliability

6. What is the difference between accounting and bookkeeping?

   • Bookkeeping: Focuses on recording daily transactions.

   • Accounting: Analyzes, interprets, and reports on financial data.

7. What is financial accounting?
   It involves preparing financial statements like the balance sheet and income statement to communicate a company’s financial position.

8. What is managerial accounting?
   It provides financial insights, such as budgets and forecasts, to help managers make informed decisions.

9. What is forensic accounting?
   A specialized area focusing on investigating fraud, embezzlement, or other financial irregularities.

10. What are the main objectives of accounting?

    • Record financial transactions.

    • Provide financial insights.

    • Ensure regulatory compliance.

    • Facilitate decision-making.

2. Key Accounting Concepts

11. What is the accounting equation?
    Assets = Liabilities + Equity.

12. Why is the accounting equation important?
    It ensures that a company’s books are balanced, showing the relationship between what the company owns, owes, and the owner's claims.

13. What are debits and credits?

    • Debit (Dr): Increases assets or decreases liabilities/equity.

    • Credit (Cr): Decreases assets or increases liabilities/equity.

14. What is the double-entry system?
    A system where every transaction affects at least two accounts, maintaining balance in the accounting equation.

15. What are assets?
    Economic resources owned by a company, such as cash, inventory, and property.

16. What are liabilities?
    Obligations the company owes, such as loans, accounts payable, or taxes due.

17. What is equity?
    The owner’s interest in the company’s assets, calculated as: Equity = Assets - Liabilities.

18. What is revenue?
    Income generated from business activities, such as sales or services.

19. What is an expense?
    Costs incurred to generate revenue, such as rent, utilities, or wages.

20. What is a journal entry?
    A record of a transaction, including accounts impacted, amounts, and descriptions.

3. Financial Statements

21. What are the main financial statements?

    • Balance Sheet: Shows assets, liabilities, and equity.

    • Income Statement: Reports revenue, expenses, and profit/loss.

    • Cash Flow Statement: Tracks cash inflows and outflows.

    • Statement of Owner’s Equity: Shows changes in equity.

22. What is a balance sheet?
    A statement summarizing a company’s financial position at a specific date.

23. What is an income statement?
    A report showing revenues, expenses, and profits over a specific period.

24. What is a cash flow statement?
    A report categorizing cash flows into operating, investing, and financing activities.

25. What is the statement of owner’s equity?
    It shows changes in equity from investments, withdrawals, and retained earnings.

26. How do financial statements interconnect?

    • Net income from the income statement links to the equity section on the balance sheet.

    • Cash flows reconcile with the cash account on the balance sheet.

27. What is a fiscal year?
    A 12-month period companies use for accounting, which may or may not align with the calendar year.

28. What is a trial balance?
    A report listing all accounts and their balances to ensure debits equal credits.

29. Why are financial statements important?
    They help stakeholders assess financial health and make informed decisions.

30. What is a comparative financial statement?
    Financial statements showing data for multiple periods to analyze trends.

4. Accounts and Ledgers

31. What is an account?
    A record used to track specific financial information, such as cash, sales, or expenses.

32. What is a ledger?
    A collection of accounts that summarizes all transactions affecting each account.

33. What is the general ledger?
    The main ledger that contains all the financial accounts of a company.

34. What is a subsidiary ledger?
    A detailed ledger that supports specific accounts in the general ledger, such as accounts receivable.

35. What is a chart of accounts?
    A list of all accounts used by an organization, categorized into assets, liabilities, equity, revenue, and expenses.

36. What is accounts payable?
    The amount a business owes to suppliers for goods or services received but not yet paid for.

37. What is accounts receivable?
    The amount customers owe to a business for goods or services provided on credit.

38. What is a T-account?
    A visual aid in the shape of the letter "T" used to represent accounts, showing debits on the left and credits on the right.

39. What is a contra account?
    An account that offsets the balance of a related account, such as accumulated depreciation reducing asset value.

40. What is the purpose of a trial balance?
    To verify that total debits equal total credits before preparing financial statements.

5. Cash and Banking

41. What is petty cash?
    A small fund kept on hand to pay for minor, everyday expenses like office supplies.

42. What is a bank reconciliation?
    A process to match the company’s accounting records with its bank statement to ensure both are accurate.

43. What is cash accounting?
    A method where transactions are recorded only when cash is received or paid.

44. What is accrual accounting?
    A method where transactions are recorded when they occur, regardless of cash movement.

45. What is a cash flow statement?
    A financial report showing the inflows and outflows of cash over a period, divided into operating, investing, and financing activities.

6. Payroll and Taxes

46. What is payroll accounting?
    The process of recording employee compensation, taxes, benefits, and deductions.

47. What are payroll taxes?
    Taxes that employers withhold from employee wages and pay to the government, such as income tax and Social Security.

48. What is gross pay?
    The total earnings of an employee before deductions like taxes or benefits.

49. What is net pay?
    The amount an employee receives after all deductions have been made.

50. What is a W-2 form?
    A form issued by employers summarizing an employee’s annual earnings and tax withholdings.

51. What is a W-4 form?
    A form employees use to indicate tax withholding preferences to their employer.

52. What is withholding tax?
    The portion of an employee’s salary withheld by the employer for tax purposes.

53. What is FICA?
    A federal payroll tax for Social Security and Medicare contributions.

54. What is a payroll journal entry?
    A record in the accounting system to document wages, taxes, and other payroll-related expenses.

55. What is a tax liability?
    The total amount of taxes owed by a business or individual to the government.

7. Inventory and Costing

56. What is inventory?
    Goods held for sale or used in production, categorized as raw materials, work-in-progress, or finished goods.

57. What is the cost of goods sold (COGS)?
    The direct costs of producing goods sold by a business, including materials and labor.

58. What is FIFO?
    First-In, First-Out: Inventory valuation method where the oldest items are sold first.

59. What is LIFO?
    Last-In, First-Out: Inventory valuation method where the newest items are sold first.

60. What is weighted average cost?
    An inventory valuation method where the cost is averaged across all units.

61. What is perpetual inventory?
    A system where inventory is updated continuously as transactions occur.

62. What is periodic inventory?
    A system where inventory is updated at specific intervals, such as monthly or yearly.

63. What is inventory turnover?
    A ratio showing how often a company sells and replaces its inventory over a period.

64. What are inventory adjustments?
    Corrections made to inventory records for discrepancies like theft or damage.

65. What is shrinkage?
    The loss of inventory due to theft, damage, or administrative errors.

8. Depreciation and Fixed Assets

66. What is depreciation?
    A method to allocate the cost of a fixed asset over its useful life as an expense.

67. What are fixed assets?
    Long-term tangible assets used in operations, such as buildings, machinery, and vehicles.

68. What is accumulated depreciation?
    The total depreciation charged against an asset since it was acquired.

69. What is straight-line depreciation?
    A method that spreads the cost of an asset evenly over its useful life.

70. What is declining balance depreciation?
    A method that applies a higher depreciation expense in the early years of an asset’s life.

71. What is salvage value?
    The estimated value of an asset at the end of its useful life.

72. What is an intangible asset?
    A non-physical asset with value, such as patents, trademarks, or goodwill.

73. What is amortization?
    Allocating the cost of intangible assets over their useful life.

74. What is capital expenditure?
    Money spent to acquire or improve long-term assets like property or equipment.

75. What is impairment?
    A reduction in the recoverable value of an asset below its carrying amount.

9. Ratios and Analysis

76. What is financial analysis?
    Evaluating financial data to assess a company’s performance and make decisions.

77. What is a liquidity ratio?
    A ratio measuring a company’s ability to meet short-term obligations, e.g., current ratio.

78. What is a profitability ratio?
    A ratio measuring a company’s ability to generate profits, e.g., net profit margin.

79. What is a solvency ratio?
    A ratio measuring a company’s ability to meet long-term obligations, e.g., debt-to-equity.

80. What is the current ratio?
    Current assets divided by current liabilities, indicating short-term liquidity.

81. What is the debt-to-equity ratio?
    Total liabilities divided by equity, showing financial leverage.

82. What is the gross profit margin?
    Gross profit divided by revenue, showing profitability after production costs.

83. What is return on equity (ROE)?
    Net income divided by shareholder equity, showing how efficiently equity generates profit.

84. What is return on assets (ROA)?
    Net income divided by total assets, measuring how effectively assets generate profit.

85. What is break-even analysis?
    Determining the point where total revenue equals total costs, resulting in no profit or loss.

10. Miscellaneous Accounting Topics

86. What is accrual accounting?
    It records revenues and expenses when they are incurred, not when cash is received or paid.

87. What is cash basis accounting?
    It records transactions only when cash is exchanged.

88. What is a fiscal year?
    A 12-month period used for accounting purposes, which may differ from the calendar year.

89. What is working capital?
    Current assets minus current liabilities, showing the short-term liquidity of a business.

90. What is a retained earnings account?
    An account summarizing the cumulative profits not distributed as dividends.

91. What is a trial balance?
    A summary of all ledger accounts to ensure debits equal credits.

92. What is goodwill?
    An intangible asset arising from the acquisition of a business, representing brand reputation or customer loyalty.

93. What is the purpose of an audit?
    To provide an independent assessment of the fairness and accuracy of financial statements.

94. What is variance analysis?
    Comparing actual results with budgeted figures to identify and analyze differences.

95. What is a contingent liability?
    A potential obligation dependent on the outcome of a future event, like lawsuits.