What is Accounting?

Accounting is the process of recording, classifying, summarizing, and interpreting financial

transactions of a business.

It helps in:

• Knowing profits or losses

• Keeping track of money (cash, bank, etc.)

• Making decisions

• Filing taxes

Accounting Principles & Standards:

• GAAP (Generally Accepted Accounting Principles): A set of rules for financial reporting.

• IFRS (International Financial Reporting Standards): A global set of accounting standards.

Current Assets:

1. Cash and Cash Equivalents

2. Accounts Receivable

3. Inventory

4. Prepaid Expenses

5. Short-Term Investments

6. Marketable Securities

7. Bank Overdraft

8. Advances to Suppliers

9. Receivables from Related Parties

10. Other Current Assets (e.g., short-term loans or advances)

Non-Current Assets:

1. Property, Plant, and Equipment (PPE)

2. Intangible Assets (e.g., patents, trademarks)

3. Goodwill

4. Long-Term Investments

5. Investment Property
 6. Deferred Tax Assets

7. Long-Term Receivables

8. Land

9. Buildings

10. Machinery and Equipment

Current Liabilities:

1. Accounts Payable

2. Short-Term Debt

3. Accrued Expenses

4. Unearned Revenue

5. Short-Term Borrowings

6. Current Portion of Long-Term Debt

7. Taxes Payable

8. Dividends Payable

9. Salaries and Wages Payable

10. Other Current Liabilities (e.g., accrued interest)

Non-Current Liabilities:

1. Long-Term Debt

2. Deferred Tax Liabilities

3. Pension Liabilities

4. Bonds Payable

5. Lease Obligations

6. Provision for Employee Benefits

7. Long-Term Provisions

8. Deferred Revenue (Non-Current)

9. Other Long-Term Liabilities

10. Contingent Liabilities (e.g., lawsuits pending)

Basic Terms
Term Simple Meaning

Transaction Any business activity involving money

Voucher A document that proves a transaction (like a bill)

Journal First record of all transactions (date-wise)

Ledger Book showing accounts (like cash, sales, etc.)

Trial Balance A list of all account balances to check accuracy

Balance Sheet A report showing what the business owns and owes

P&L Account Shows income, expenses, profit or loss

Types of Accounts/Golden Rules of Accounting

There are 3 main types of accounts:

1. Personal Account: Related to people or organizations

→ Rule: Debit the receiver, Credit the giver

2. Real Account: Related to assets (cash, buildings, etc.)

→ Rule: Debit what comes in, Credit what goes out

3. Nominal Account: Related to expenses, incomes, losses, or gains

→ Rule: Debit all expenses/losses, Credit all incomes/gains

Accounting Process (Steps)

1. Identify the transaction

2. Record it in the Journal

3. Post it to Ledger

4. Prepare Trial Balance

5. Create Final Accounts (Profit & Loss A/c and Balance Sheet)

Financial Statements

1. Trading Account: Calculates Gross Profit

2. Profit & Loss Account: Shows Net Profit or Net Loss

3. Balance Sheet: Shows business position (Assets = Liabilities + Capital)

Accounting Principles (Concepts)

Some important principles:

• Going Concern: Business will continue

• Accrual: Record income/expenses when they happen, not when cash is received/paid
 • Consistency: Follow same method every year

• Matching: Match expenses with related income

• Conservatism: Be cautious, record possible losses, not possible gains

Branches of Accounting
Branch Purpose
Records and reports business
Financial
results
Cost Tracks cost of production
Management Helps in internal decision-making
For tax planning and filing
Tax
returns
Auditing Checks if accounts are correct

Accounting Software & Tools

Modern businesses use accounting software for speed and accuracy:

Software Use

Tally Used widely in India for bookkeeping

QuickBooks Small businesses and freelancers

Zoho Books Cloud-based accounting

SAP Used by large companies for ERP & finance

Excel Used for manual accounting and reports

Types of Accounting Records

Record Type Use

Journal First entry of every transaction

Ledger Classified summary of all accounts

Cash Book Records all cash and bank transactions

Purchase Book Tracks all purchases on credit

Sales Book Records credit sales

Petty Cash Book Records small daily expenses

Important Topics (with Simple Explanations)

1. Accounting Principles

• Accrual: Record income/expenses when they happen, not when cash is received/paid.

• Cash: Record only when cash is received or paid.

• GAAP: Generally Accepted Accounting Principles – the rules we follow while preparing
accounts.

2. Double-Entry System

• Every transaction has 2 effects: one debit and one credit.

• Example: Bought furniture for ₹10,000

o Debit: Furniture A/c

o Credit: Cash/Bank A/c

3. Journal, Ledger, Trial Balance

• Journal: First record of all transactions (day-to-day).

• Ledger: Grouping of similar transactions (e.g., all cash entries).

• Trial Balance: List of all debit and credit balances to check accuracy.

4. Final Accounts

• Trading & P/L Account: Shows profit or loss.

• Balance Sheet: Shows the financial position (Assets = Liabilities + Capital).

5. Bank Reconciliation Statement

• Compares bank statement and company cash book.

• Helps find differences like cheques not cleared, wrong entries, etc.

6. TDS & GST

• TDS: Tax deducted at source (e.g., on salaries, rent).

• GST: Goods and Services Tax – collected on sales/services at fixed rates.

7. Depreciation

• Value of an asset decreases over time due to use.

 • Straight Line Method: Equal depreciation every year.

• WDV Method: Depreciation on the book value every year.

8. Accounts Receivable/Payable

• Receivable: Money others owe to us.

• Payable: Money we owe to others.

9. Working Capital

• Formula: Current Assets - Current Liabilities

• Shows how much money is available for daily operations.

Common Interview Questions (with Answers)

1. What is the difference between accounts payable and receivable?

Accounts Payable = Amount we have to pay to others.

Accounts Receivable = Amount others have to pay us.

2. How do you handle a mismatch in a trial balance?

I check all ledger balances, recalculate totals, and verify entries to find and correct the mistake.

3. What is depreciation?

Depreciation is the decrease in the value of an asset over time. It is treated as an expense.

4. How would you treat outstanding expenses?

It is an expense that is due but not yet paid.

Entry:

Expense A/c – Dr.

To Outstanding Expense A/c

5. What is the journal entry for sale of fixed asset?

If sold for cash:

Cash A/c – Dr.

Accumulated Depreciation A/c – Dr.
To Fixed Asset A/c
To Profit on Sale (if any)

6. How do you ensure accuracy in reports?

By double-checking entries, using formulas in Excel/Tally, and verifying with supporting documents.

7. Are you comfortable using Tally/Excel?

Yes, I can enter vouchers in Tally and use Excel formulas like SUM, VLOOKUP, and Pivot Table.

8. Explain bank reconciliation.

It is the process of matching the company’s cash book with the bank statement to find any
differences.

9. What are contingent liabilities?

Liabilities that may arise in the future depending on certain events (like a pending court case).

10. How do you calculate working capital?

Working Capital = Current Assets - Current Liabilities.

It shows the company’s liquidity to manage day-to-day expenses.

Would you like this in a downloadable PDF format or want to practice with a mock interview next?

4o

You said:

why you should prepare trading account p&l account and balance sheet

2/2

ChatGPT said:

Great question! Here's a simple explanation of why we prepare the Trading Account, Profit & Loss
Account, and Balance Sheet:

1. Trading Account – To find Gross Profit or Loss

• Why?
To know whether the core business activities (like buying and selling goods) made a profit or
not.
 • Shows:
→ Sales, purchases, direct expenses (like wages, carriage).
→ Result = Gross Profit (if sales > cost) or Gross Loss.

2. Profit & Loss (P&L) Account – To find Net Profit or Loss

• Why?
To calculate the final profit or loss after all indirect expenses and incomes.

• Shows:
→ Expenses like rent, salary, electricity
→ Incomes like interest received, commission
→ Result = Net Profit or Net Loss

3. Balance Sheet – To know financial position

• Why?
To understand the company’s financial health – what it owns and what it owes.

• Shows:
→ Assets (cash, stock, buildings, etc.)
→ Liabilities (loans, creditors, etc.)
→ Capital

Summary Table:

Statement Purpose Shows

Trading A/c Gross Profit/Loss Sales, purchases, direct expenses

P&L A/c Net Profit/Loss Indirect expenses and incomes

Balance Sheet Financial Position Assets, liabilities, and capital

Basic Accounting Concepts:

• The Accounting Equation:

Answer: The basic equation of accounting is:
Assets = Liabilities + Owner's Equity
This means that what the company owns (assets) is financed by what it owes (liabilities) and
the owner’s investment (equity).

• Double Entry System:

Answer: In accounting, every transaction affects at least two accounts. For example, if a
company buys equipment for cash, its assets (equipment) increase, and its assets (cash)
decrease.

• Accrual vs. Cash Accounting:

Answer:

o Accrual Accounting: Revenues and expenses are recorded when they are earned or
incurred, not when cash is received or paid.

o Cash Accounting: Revenues and expenses are recorded when cash is actually
received or paid.

2. Financial Statements:

• Income Statement:
Answer: It shows the company’s profits or losses over a period (e.g., a year). It includes
revenue, expenses, and the resulting profit or loss.

• Balance Sheet:
Answer: A snapshot of a company’s financial position at a specific point in time, showing its
assets, liabilities, and owner’s equity.

• Cash Flow Statement:

Answer: It shows how money moves in and out of a company—where the company’s cash
comes from and how it’s spent (operating, investing, and financing activities).

3. Accounting Principles & Standards:

• GAAP vs. IFRS:

Answer:

o GAAP (Generally Accepted Accounting Principles): Used mainly in the U.S. for
consistent financial reporting.

o IFRS (International Financial Reporting Standards): Used in many countries outside

the U.S. and are more globally accepted.

• Revenue Recognition Principle:

Answer: Revenue is recorded when it’s earned, not when the payment is actually received
(e.g., when goods are delivered, not when the customer pays).

• Matching Principle:
Answer: Expenses should be recorded in the same period as the revenues they helped
generate (e.g., if you make a sale, the cost of goods sold is recorded at the same time).
4. Cost Accounting:

• Fixed vs. Variable Costs:

Answer:

o Fixed Costs: Do not change with the level of production (e.g., rent).

o Variable Costs: Change with the level of production (e.g., raw materials).

• Break-even Analysis:
Answer: The break-even point is when total revenue equals total costs, meaning the
company is not making a profit but not losing money either.

• CVP Analysis:
Answer: It helps to understand how changes in costs and sales affect profit. It’s used to make
decisions about pricing and cost control.

5. Management Accounting:

• Budgeting:
Answer: The process of planning how to spend your company’s money in the future,
including estimating revenues and expenses.

• Variance Analysis:
Answer: Comparing actual performance with the budgeted or expected performance to
understand why there are differences.

• Standard Costing:
Answer: Setting a standard cost for products or services and comparing it with actual costs
to find out any differences (variances).

6. Taxation and Compliance:

• Direct vs. Indirect Taxes:

Answer:

o Direct Taxes: Paid directly to the government by the person (e.g., income tax).

o Indirect Taxes: Paid by consumers when buying goods or services (e.g., GST).

• GST (Goods and Services Tax):

Answer: A tax applied to goods and services sold in India, where businesses collect tax from
consumers and pass it on to the government.

• Tax Planning:
Answer: Tax planning involves arranging your financial affairs in a way that minimizes your
tax liabilities legally.

7. Auditing:

• Internal vs. External Auditing:

Answer:

o Internal Audit: An internal team reviews the company's finances and internal
controls.
 o External Audit: An independent third party reviews the company's financial
statements.

• Audit Procedures:
Answer: Auditors check financial statements to verify their accuracy through various
procedures like checking receipts, invoices, and verifying transactions.

8. Financial Ratios & Analysis:

• Liquidity Ratios:
Answer: These ratios show how easily a company can pay off its short-term debts (e.g.,
Current Ratio: Current Assets ÷ Current Liabilities).

• Profitability Ratios:
Answer: These ratios measure the company’s ability to generate profits (e.g., Gross Profit
Margin: (Revenue - Cost of Goods Sold) ÷ Revenue).

• Leverage Ratios:
Answer: These ratios show the company’s use of debt to finance its operations (e.g., Debt-
to-Equity Ratio: Total Debt ÷ Total Equity).

• Efficiency Ratios:
Answer: These ratios show how well a company uses its resources (e.g., Return on Assets:
Net Income ÷ Total Assets).

9. Inventory Valuation Methods:

• FIFO (First In, First Out):

Answer: The first items purchased are the first to be sold, which is useful when prices are
rising.

• LIFO (Last In, First Out):

Answer: The last items purchased are the first to be sold, which can reduce taxes in times of
rising prices.

• Weighted Average Cost:

Answer: The average cost of all units in inventory is used to value the inventory.

10. Working Capital Management:

• Working Capital:
Answer: It’s the difference between current assets and current liabilities. Positive working
capital means the company can meet its short-term obligations.

• Cash Management:
Answer: Ensuring the company has enough cash to meet its daily needs while avoiding too
much idle cash.

• Receivables & Payables Management:

Answer: Ensuring that customers pay on time (receivables) and that the company doesn’t
delay its own payments unnecessarily (payables).
Here is the list of 20 Indian Accounting Standards (Ind AS) in order:

1. Ind AS 1 - Presentation of Financial Statements

2. Ind AS 2 - Inventories

3. Ind AS 7 - Statement of Cash Flows

4. Ind AS 8 - Accounting Policies, Changes in Accounting Estimates, and Errors

5. Ind AS 10 - Events After the Reporting Period

6. Ind AS 12 - Income Taxes

7. Ind AS 16 - Property, Plant, and Equipment

8. Ind AS 17 - Leases

9. Ind AS 18 - Revenue

10. Ind AS 19 - Employee Benefits

11. Ind AS 20 - Accounting for Government Grants and Disclosure of Government Assistance

12. Ind AS 21 - The Effects of Changes in Foreign Exchange Rates

13. Ind AS 23 - Borrowing Costs

14. Ind AS 24 - Related Party Disclosures

15. Ind AS 27 - Separate Financial Statements

16. Ind AS 28 - Investments in Associates and Joint Ventures

17. Ind AS 32 - Financial Instruments: Presentation

18. Ind AS 33 - Earnings Per Share

19. Ind AS 36 - Impairment of Assets

20. Ind AS 37 - Provisions, Contingent Liabilities, and Contingent Assets

Here are simplified answers to the accounting-related interview questions:

1. What is the difference between accounting and auditing?

o Accounting involves recording, summarizing, and reporting financial transactions.

Auditing is the process of reviewing and verifying the accuracy and fairness of
financial statements and reports.

2. Can you explain the basic accounting equation?

o The basic accounting equation is: Assets = Liabilities + Equity. This means what a
company owns (assets) is funded by what it owes (liabilities) and the owner’s
investment (equity).

3. What are the different types of financial statements?

o The main types are:

▪ Income Statement: Shows a company’s profit or loss over a specific period.

▪ Balance Sheet: Shows a company’s financial position at a specific point in

time.

▪ Cash Flow Statement: Shows the flow of cash in and out of a company.

4. What is the importance of a balance sheet?

o A balance sheet gives an overview of a company’s financial health by showing its

assets, liabilities, and equity at a specific point in time.

5. What are accruals and deferrals in accounting?

o Accruals are revenues or expenses recorded before the cash is actually received or
paid. Deferrals are revenues or expenses recorded after the cash is received or paid.

6. What is the difference between a trial balance and a balance sheet?

o A trial balance is a list of all account balances used to check if the books are
balanced. A balance sheet is a formal financial statement showing a company’s
assets, liabilities, and equity.

7. Can you explain the concept of double-entry bookkeeping?

o Double-entry bookkeeping means every transaction affects at least two accounts.

For example, when you buy something, it increases one asset (like inventory) and
decreases another (like cash).

8. What are fixed assets and how are they depreciated?

o Fixed assets are long-term assets like buildings, machinery, or vehicles. They lose
value over time due to use and wear, a process called depreciation.

9. What is working capital, and why is it important?

o Working capital is the difference between current assets and current liabilities. It
shows if a company can pay its short-term debts. It’s important for daily operations.

10. How do you calculate net income from a set of financial statements?
 o Net income is calculated by subtracting total expenses (like operating expenses and
taxes) from total revenue. Formula: Net Income = Revenue - Expenses

11. Can you explain the purpose of a cash flow statement?

o A cash flow statement shows how money flows in and out of a business, helping to
understand the company’s liquidity and ability to meet its obligations.

12. What is the role of internal controls in accounting?

o Internal controls are processes that ensure the accuracy and integrity of financial
records, prevent fraud, and help companies comply with laws and regulations.

13. What are current liabilities and non-current liabilities?

o Current liabilities are debts that need to be paid within a year (like accounts
payable). Non-current liabilities are debts that are due after one year (like long-term
loans).

14. How would you handle a situation where the books don’t balance?

o I would carefully review all transactions, ensure that each entry is recorded correctly,
and check if any transactions were omitted or duplicated.

15. What do you understand by the term "revenue recognition"?

o Revenue recognition is the principle that revenue should be recorded when it is

earned, not necessarily when cash is received.

16. What are the differences between IFRS and GAAP?

o IFRS (International Financial Reporting Standards) is used globally, while GAAP

(Generally Accepted Accounting Principles) is used mainly in the U.S. They have
differences in how certain transactions are handled, but both aim to ensure
transparency in financial reporting.

17. What is goodwill, and how is it calculated?

o Goodwill is an intangible asset that represents the value of a company’s reputation,

brand, and customer relationships. It’s calculated as the difference between the
purchase price and the fair value of acquired assets and liabilities.

18. Can you explain the difference between accounts payable and accounts receivable?

o Accounts payable is the money a company owes to others (liabilities). Accounts

receivable is the money others owe to the company (assets).

19. What is financial ratio analysis, and how is it used?

o Financial ratio analysis involves calculating ratios like profit margins or debt-to-
equity to evaluate a company’s financial performance and health.

20. What steps do you follow to close the books at the end of the financial year?

o I would ensure all transactions are recorded, prepare the financial statements,
reconcile accounts, and make necessary adjustments (like depreciation) before
closing the books.
• Revenue is the total money coming in from sales.

• Income refers to the earnings after all costs and taxes.

• Profit is the money left after all expenses have been deducted, which is the
measure of financial success