100 Basic Accounting Terms for Interview

Basic Accounting Terms for Interview word cloud

Accounting interviews can be tricky and we compiled 100 Basic Accounting Terms for Interview.

  1. Debit – The term ‘Debit’ denotes the left side or leftwards column of a given account.
  2. Credit – The term ‘Credit’ denotes the right side or rightward column of a given account.

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3. Journal – It is a day-book in which all the transactions are recorded regularly & is also called the book of prime entry. Further, the process of recording transactions in the journal is known as journalizing.

4. Ledger – It is a book in which all the transactions from the journal related to different accounts are recorded in one place under that account head. This process is called posting. Ledger is also called the principal book of account as it implicitly helps in the preparation of the financial statements.

5. Financial Statements – The income statement, balance sheet & cash flow statement are collectively termed financial statements. They provide information about the financial performance, cash flow, and financial position of the business. They are also called final accounts.

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6. Income Statement – The trading account and profit & loss account are together termed as an income statement. It helps in demonstrating the financial performance of a business over a given accounting year. It is based on the flow concept.

7. Balance Sheet – It is a statement showing all the assets & liabilities held by a business. It reflects the financial position of the business on a specified date. It is based on the stock concept.

8. Trial Balance – It is a list of all the debit & credit balances of various accounts that are present in the ledger of a business. It helps in maintaining arithmetical accuracy & in the preparation of the financial statements.

9. Trading Account – It is the account in which all the direct expenses, direct incomes along with net sales, net purchases, and opening & closing stock are recorded. The balance of this account will either be gross profit or gross loss.

10. Profit & Loss Account – It is the account in which all the Indirect expenses & Indirect incomes are recorded. The gross profit or loss from the trading account is transferred here and the balance of this account will either be a net profit or a net loss.

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11. Profit & Loss Appropriation Account – It is an extension of the profit & loss account. The items that are an appropriation of profits such as interest on capital, commission to partners, etc. are recorded in this account. It shows how the profit earned during the year is distributed.

12. Cash Flow Statement – It is a statement that shows how the cash is generated and spent during a specific period. It reflects the inflows & outflows of cash flows from operating, investing & financing activities of the business over the given financial year.

13. Funds Flow Statement – It is the statement that shows the inflows & outflows of funds over a given period, thereby revealing the possible reasons behind the discrepancies in financial position between the two balance sheet dates of the enterprise.

14. Suspense Account – It is the account in which transactions are temporarily documented in the event of the uncertainty of accurate recording of such transactions in the books.

15. Depreciation – It refers to the amount of gradual fall in the value of a tangible fixed asset due to wear & tear obsolescence, or any other reasons over its expected useful life.

16. Amortization – It refers to the periodic writing off of intangible assets like patents, trademarks, copyrights, etc. over their estimated useful life.

17. Depletion – It is a measure of exhaustion of the wasting assets. For example- the extraction of coal from the coal mines.

18. Tangible Assets – These are the assets that have a physical existence i.e. can be seen and touched. For example – machinery, furniture, etc.

19. Fictitious Assets – These are the assets that are actually a kind of expenditure but benefit the enterprise for more than one accounting year. Hence, these fictitious assets also do not have any realizable value. For example – Advertisement expenditure.

20. Bank Reconciliation Statement – It is a statement that is prepared to reconcile the bank balance in the cash book with the balance in the bank pass-book.

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21. Sundry Debtors – Debtors are individuals, firms, or corporates who owe money to others. In the case of a business, debtors owe money to the organization against the goods sold or services rendered to them on credit.

22. Sundry Creditors – Creditors are individuals, firms, or corporates to whom others owe money. In the case of a business, the organization owes an amount to the creditors against the goods bought or services received on credit.

23. Account – An account is simply a record of all the transactions relating to a particular income, expense, asset, etc are recorded under a given head.

24. Accounting – It is the process of recording, classifying & summarizing all the material monetary transactions of a business & analyzing the results thereof.

25. Book Keeping – Bookkeeping is the basis of accounting. It includes identification, measurement, and documentation of the financial transactions & their classification thereof.

26. Purchases Book – It is the book in which all the transactions relating to the credit purchases by the business organization are recorded.

27. Special Journal – It collectively refers to all the subsidiary books namely sales book, purchases book, sales return book, purchases return book, journal proper & cash book. Also, no separate journal entries are passed for the transactions recorded in the special journal.

28. Petty Cash Book – It is like a petty cash account in which petty expenses are recorded by the petty cashier regularly.

29. Cash Book – It is one of the books of original entries in which all the cash & bank transactions are documented. There are three types of cash book- single column (cash), double column (cash & bank), and triple column (cash, bank, & discount).

30. Source Voucher – It is a document that provides evidence or proof in support of a monetary transaction & hence acts as a supporting document. For example – cash memos, invoices, pay-in-slip, cheques, etc.

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31. Accounting Voucher – It is a written document prepared by the accountant for analyzing the accounts to be debited or credited in the books. It is based on source vouchers.

32. Debit Note – It is an accounting voucher evidencing that a debit has been made against the party named in it. It is also known as a debit memo.

33. Credit Note – It is an accounting voucher evidencing that a credit has been made against the party named in it. It is also known as a credit memo.

34. Working Capital – It reflects the liquidity level of a business in carrying out its day-to-day operations. It is synonymous with the term net working capital. It is equal to the difference between the firm’s current assets & current liabilities and can be positive or negative.

35. Compound Entry – It is an accounting entry in which more than two accounts are involved and hence more than one account is either debited or credited.

36. Contra Entry – A contra entry is an entry that is recorded when a transaction affects both cash & bank resulting in zero effect. Hence, we define it mostly in reference to cash books only. For example –  cash deposited into the bank.

37. Revaluation Account – This account is prepared to reassess the values of existing assets & liabilities of a business, in addition, to recording its unrecorded assets & liabilities. This account is nominal in nature.

38. Realization Account – This account is prepared to close the various accounts in the books of a partnership firm at the time of its dissolution and thus helps in determining the profit or loss on the realization of the firm’s assets & the settlement of its liabilities.

39. Bills Payables – A bill of exchange when accepted by a person becomes bills payable for that person. The amount of such money will be payable by that person on a specified date in the future.

40. Bills Receivables – A bill of exchange becomes bills receivable for the person who draws it and sends it for acceptance to the debtor. The amount of such money will receivable by the drawer on a specified date in the future.

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41. Revenue Expenditure – It is a kind of expenditure the benefit of which gets exhausted within a given accounting year. For example – salary, rent, commission, etc.

42. Deferred Revenue Expenditure – It is a kind of revenue expenditure that benefits the business for more than one accounting year. For example – advertisement expenditure.

43. Capital Expenditure – It refers to the expenditure that is incurred either to repay the liabilities or to create assets of a business.

44. Abnormal Loss – It refers to the unexpected loss which is a result of some unusual activity or neglect. For example – loss of stock by fire, etc.

45. Trade Investments – These are the investments that are made majorly to run the business operations smoothly. For example – investment in security deposits to gain dealership, etc.

46. Direct Expenses – These are the expenses incurred in procurement, purchase, or production of the goods till they are fetched to the place of business. Further, such expenses are debited to the trading account. For example – wages, power & fuel, carriage inwards, etc.

47. Indirect Expenses – These are expenses incurred either to run a business as a whole or its segments. Hence, indirect expenses can not be directly linked to a cost object & are thus debited in the profit & loss account. For example – salary, rent, freight outwards, etc.

48. Prepaid Expenses – It refers to the expenses that have been paid in advance and the benefit of which will be available in the subsequent accounting years. It forms part of the current assets of the firm. For example – prepaid rent, prepaid salary, etc.

49. Outstanding Expenses – These are the expenses that have been incurred but not yet paid. Hence, outstanding expenses are a part of a business firm’s current liabilities.

50. Non-Trade Investments – Investments made in the shares, debentures, etc of other companies to earn additional income from activities other than own business operations are called non-trade investments. Such investments are made solely to earn income & are not meant for the furtherance of the business.

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51. General Reserves – General reserves represent the money that is appropriated out of the business profits, but is not meant for any specific purpose. Hence, general reserves can be utilized to support the working capital needs of the business or expand the business, etc.

52. Provisions – Provisions represent the money that is set aside for the purpose of meeting some future liabilities or losses. It is a charge against profits.

53. Reserves – Being an appropriation of profits reserves are created only in the years in which the business makes profits by setting aside some money out of those profits. They are mainly created to strengthen & expand the business. For example – general reserves

54. Accrued Income – It refers to the income that has been already earned usually as against the services rendered or goods sold but money is yet to be received.

55. Journal Proper – It is one of the subsidiary books in which all the leftover transactions are recorded i.e. the transaction that are not recorded in any of the other subsidiary books like cash book, sales book, purchases book, etc.

56. Write Off – It refers to the elimination of an asset or liability from the books of accounts because either it is no longer of any worth for the enterprise or has been settled.

57. Capitalization – It refers to a process whereby a cost is included in the value of an asset instead of being expensed completely in the same year when such cost was incurred. It is written off over the useful life of such an asset.

58. Financial Ratios – These are the accounting ratios that help in carrying out the ratio analysis of the financial statements of a business, thereby making the analysis more comprehensive. Broadly, there are four types of financial ratios namely liquidity ratios, solvency ratios, turnover ratios, & profitability ratios.

59. Prudence Concept – It states that a business must account for all the anticipated losses and ignore all the prospective gains. This concept is also termed as conservatism concept.

60. Cash Basis of Accounting – It is a method of accounting in which transactions are recorded in the books of accounts only at the time of payment or receipt of cash.

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61. Accrual Basis of Accounting – It is a method of accounting in which transactions are recorded in the books as and when they occur, irrespective of the cash receipt or cash payment.

62. Book Value – It is the net value at which an asset is recorded in the books of accounts.

63. Fair Value / Market Value – It is the price at which an asset is saleable in the marketplace at a given point in time.

64. Historical Cost – It refers to the amount paid by an enterprise at the time of acquisition of an asset.

65. Sundry Expenses – It refers to all those miscellaneous expenses that are not incurred on a recurring basis by a business entity.

66. Operating Activities – These refer to the major revenue-generating or key dealing activities of a business firm. For example – the sale of furniture by a furniture manufacturing entity would be treated as one of its operating activities.

67. Investing Activities – Activities relating to the purchase, sale & disposal of long-term assets or other investments, excluding the ones that are a part of cash equivalents are called investing activities. For example – the purchase of furniture by a consulting firm would be treated as one of its investing activities.

68. Drawings – It refers to the amount of capital withdrawn or goods taken by the owner for personal use. Also, this term is majorly used for sole proprietorship & partnership firms.

69. Capital Employed / Capital – It directs to the resources or money invested by the owners of the business to start or run the business.

70. Retained Earnings – The net profit available with a business firm after the payment of dividends to its shareholders, when retained or held within the business, is called retained earnings.

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71. Net Profit – It refers to the excess of total income over the total expenses of a business. In order words, the excess of credit side of profit & loss account over its debit side is called net profit.

72. Accounting Equation – It is a mathematical equation reflecting the equality between the total assets & the total liabilities of an enterprise. Further, it is based on the concept of duality & forms the basis of accounting.

73. Cash Equivalents – These are the most liquid assets in a firm’s balance sheet that are readily convertible into known amounts of cash without much loss in value. For eg – bank balance, short-term deposits, marketable securities, etc.

74. Accounting Cycle – It refers to the process starting from the recording of business transactions & ending with the preparation of financial statements.

75. Contingent Liabilities – These are the liabilities that may or may not arise depending upon certain unforeseen situations. Hence, these are never recorded in an entity’s balance sheet but, are always shown in the notes.

76. Current Liabilities – These are the liabilities that are repayable within one accounting year. For example – creditors, bills payables, etc.

77. Reserve Fund – It is an amount that is set aside from the profits of the business to be able to meet any unexpected financial obligation. However, the fund could be invested outside of the business in securities or short-term instruments, etc.

78. Contra Asset – A contra asset is a negative asset account that is coupled with a respective asset account. Further, a contra asset account’s function is to maintain a reserve that decreases the amount in the matched asset account & thus it always has a credit balance. For example – accumulated depreciation account.

79. Contra Liability – A contra Liability is a negative liability account that is coupled with a respective liability account. Further, a contra liability account’s function is to hold a reserve that decreases the amount in the matched liability account & thus it always has a debit balance. For example – discount on creditors’ accounts.

80. Comparative Balance Sheet – It directs to the horizontal analysis of the same accounts or groups of accounts in the balance sheets of the same entity on different dates.

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81. Common Size Statements – It refers to the vertical analysis of the income statement & the balance sheet by taking a common base that is revenue from operations & total assets or liabilities in the two statements, respectively. Also, common size statements can be prepared for intra-firm as well as inter-firm comparisons.

82. Income & Expenditure Account – It is a nominal account that summarises all the incomes and expenses of revenue nature of a not-for-profit organization over an accounting year. Further, the balance of this account would be either surplus or a deficit of income over expenses.

83. Receipts & Payment Account – This account is a synopsis of cash receipts & payments including the ones made by/through the bank over an accounting year by a not-for-profit organization. It is always prepared on a cash basis & is based on the NPO’s cash book.

84. Liquid Assets – These are the assets that are readily convertible into known amounts of cash or cash equivalents without much loss in their value. For example – cash, treasury bills, etc.

85. Cost of Goods Sold – It refers to the direct cost incurred by a business for manufacturing goods to be sold or for rendering services.

86. Rebate – It is a kind of compensation that is offered on already completed sales to compensate for reasons other than for which trade discount is allowed eg – poor quality of goods sold, etc.

87. Insolvency – The condition when a business or a person is not in a position to repay debts is called insolvency.

88. Revenue from Operations – Revenue from operations or operating revenue can be defined as the income generated by an entity from its daily core business operations.

89. Interest on Drawings – It refers to the certain percentage charged by the business from the owners on the total amount of drawings made by them during an accounting year. This term is majorly used for sole proprietorships & partnership firms.

90. Inventory – It refers to the stock of tangible assets held by an enterprise either for sale or further production of the goods to be sold during the normal course of business. There are three types of inventory namely inventory of raw materials, work-in-progress inventory, & inventory of finished goods.

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91. Realization or Dissolution Expenses – These are the expenses incurred by a partnership firm in order to carry out its dissolution process.

92. Normal Profit – It refers to the amount of profit that is normally earned by businesses dealing in the same industry & having a similar amount of capital investment. Further, it is based on a normal rate of return.

93. Super Profit – The excess of the average profit of an enterprise over its normal profit is called super profit. Usually, reputed firms having an edge over their competitors earn a  higher super profit.

94. Real Account – It is an account relating to the tangible and intangible assets of the business. However, assets like debtors, bank balance, prepaid rent, etc are the exception, as they are not real accounts but personal accounts. Examples of real accounts are furniture, machinery, etc.

95. Nominal Account – It is an account relating to the incomes, expenses, gains, losses, etc of the business. For example – salary account, rent account, etc.

96. Personal Account – It is the account relating to a person including a living person, companies, clubs, cooperative societies, debtors, etc. Natural, Artificial & Representative are the three types of personal accounts. For example – debtors account, drawings account, accrued income, etc.

97. Sacrificing Ratio – It refers to the ratio in which one or more partners offer their share of profits in the favour of the other partners in a partnership firm. It is equal to the difference between the old ratio & the new ratio, respectively. It is usually computed at the time of change in profit sharing ratio, admission, retirement, or death, etc.

98. Gaining Ratio – It refers to the ratio in which one or more partners gain a share of profits as a result of sacrifice by the other partners in a partnership firm. It is equal to the difference between the new ratio & the old ratio, respectively. It is usually computed at the time of change in profit sharing ratio, admission, retirement, or death of a partner, etc.

99. Expense – It is the cost incurred by a business to generate revenue.

100. Cheques in Hand – These are the cheques that have been received but, are yet to be deposited in the bank. Hence, such cheques are treated as current assets as these can be encashed from the bank at any point in time.

 

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