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Are you looking for interview preparation ways? Are you worried for job interview preparation? Adjusting Entries are the journal entries that are recorded at the end of accounting period to modify the closure balances in other ledger accounts.
Below are the list of frequently asked Adjusting Entries job interview questions and answers which can make you feel comfortable to face the interviews:.
Question 1. Answer : Under the accrual basis of accounting, revenues are reported on the income statement when they are earned.
Under the cash basis of accounting, revenues are reported on the income statement when the cash is received. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.
Under the cash basis, my December income statement will show no revenues. Instead, the December services will be reported as January revenues under the cash method. There will be a difference on the balance sheet, too. To illustrate a difference in expenses, we will assume that the heat and light expense that I used in my accounting service is metered by the utility on the last day of the month.
The utilities that I used in December will appear on a bill that I receive in January and will pay on February 1. Under the accrual basis of accounting, the utilities that I used in December will be estimated and will be reported as an expense and a liability on the December financial statements.
Under the cash basis of accounting, the utilities used in December will be recorded as an expense on February 1, when the utility bills are paid. Answer : Accruals are adjustments for 1 revenues that have been earned but are not yet recorded in the accounts, and 2 expenses that have been incurred but are not yet recorded in the accounts.
The accruals need to be added via adjusting entries so that the financial statements report these amounts. An example of an accrual for revenue involves your electric utility company.
The utility used coal and many employees in December to generate electricity that customers received in December. However, the utility doesn't bill the electric customers for the December electricity until the meters are read in January. To have the proper amounts on the utility's financial statements, there needs to be an adjusting entry to increase revenues that were earned in December and the receivables that the utility has a right to as of December An example of an accrual involving an expense is an employee's bonus that was earned in , but will not be paid until The financial statements need to reflect the bonus expense and the bonus liability.
Therefore, prior to issuing the financial statements an adjusting entry is prepared to record this accrual. Question 3. Answer : Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant's general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to the preparation of the financial statements. Here is an example. As of December 31 the company will not have an invoice or payment for the interest that the company is incurring.
The reason is that all of the interest will be due on February In order for the financial statements to be correct on the accrual basis of accounting, the accountant needs to record an adjusting entry dated as of December Question 4. Accelerated depreciation means that an asset will be depreciated faster than would be the case under the straight line method. Although the depreciation will be faster, the total depreciation over the life of the asset will not be greater than the total depreciation using the straight line method.
This means that the double declining balance method will result in greater depreciation expense in each of the early years of an asset's life and smaller depreciation expense in the later years of an asset's life as compared to straight line depreciation. Declining balance refers to the asset's book value or carrying value at the beginning of the accounting period. Book value is an asset's cost minus its accumulated depreciation.
The asset's book value will decrease when the contra asset account Accumulated Depreciation is credited with the depreciation expense of the accounting period. As you can see, the amount of depreciation expense is declining each year. Others may choose to follow the original formula. Question 5. What Is A Journal Entry? Answer : In manual accounting or bookkeeping systems, business transactions are first recorded in a journal A manual journal entry that is recorded in a company's general journal will consist of the following:.
These journalized amounts which will appear in the journal in order by date are then posted to the accounts in the general ledger. Today, computerized accounting systems will automatically record most of the business transactions into the general ledger accounts immediately after the software prepares the sales invoices, issues checks to creditors, processes receipts from customers, etc.
The result is we will not see journal entries for most of the business transactions. However, we will need to process some journal entries in order to record transfers between bank accounts and to record adjusting entries. For example, it is likely that at the end of each month there will be a journal entry to record depreciation.
This will include a debit to Depreciation Expense and a credit to Accumulated Depreciation. In addition, there will likely be a need for journal entry to accrue interest on a bank loan. This will include a debit to Interest Expense and a credit to Interest Payable.
Question 6. Answer : Reconciling an account often means proving or documenting that an account balance is correct. For example, we reconcile the balance in the general ledger account Cash in Checking to the balance shown on the bank statement. The objective is to report the correct amount in the general ledger account Cash in Checking.
You will often need to adjust the general ledger account balance for items appearing on the bank statement that were not entered in the general ledger account. I recall being asked to reconcile the general ledger account Freight Payable. What I needed to do was provide documentation that the balance in Freight Payable was proper.
I proceeded to look at the shipments of recent sales and then determined how much we would be obligated to pay for the freight on those sales. We then adjusted the balance in Freight Payable to my documented amount. This reconciliation was done to have the correct account balance and to provide the outside auditors with documentation which could easily be reviewed. I also reconciled the balance in Utilities Payable by computing the daily cost of each utility that the company used.
The cost per day was then multiplied by the number of days since the last meter reading date shown on the utility bills already entered in our accounting system. We then adjusted the Utilities Payable account balance to be equal to the documented amount. Question 7. What Is Accounts Receivable? For example, a manufacturer will have an account receivable when it delivers a truckload of goods to a customer on June 1 and the customer is allowed to pay in 30 days.
From June 1 until the company receives the money, the company will have an account receivable and the customer will have an account payable. Accounts receivables are also known as trade receivables. Companies who sell on credit are unlikely to have liens on their customers' property. Hence, there is a risk that the full amount of their accounts receivable might not be collected. This means that companies need to cautious when granting credit and establishing an account receivable.
If there is uncertainty of a potential or existing customer's credit worthiness, it is wise for the company to require the customer to pay with a credit card before delivering goods or services. It is also important for a company to monitor its accounts receivable and to immediately follow up with any customer who has not paid as agreed. An aging of accounts receivable is a tool that will help and it is readily available with most accounting software.
A general rule is that the older a receivable gets, the less likely it will be collected in full. Accounts receivable are reported as a current asset on a company's balance sheet.
Good accounting requires that an estimate be made for the amount that is unlikely to be collected. That estimate is reported as a credit balance in a related receivable account such as Allowance for Doubtful Accounts. Any adjustments to the Allowance balance will also be recorded in the income statement account Uncollectible Accounts Expense. Question 8. What Are Prepaid Expenses? Answer : Prepaid expenses are future expenses that have been paid in advance.
You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. The amount of prepaid expenses that have not yet expired are reported on a company's balance sheet as an asset. As the amount expires, the asset is reduced and an expense is recorded for the amount of the reduction.
Hence, the balance sheet reports the unexpired costs and the income statement reports the expired costs. The amount reported on the income statement should be the amount that pertains to the time interval shown in the statement's heading.
A common prepaid expense is the six-month premium for insurance on a company's vehicles. Since the insurance company requires payment in advance, the amount paid is often recorded in the current asset account Prepaid Insurance. If the company issues monthly financial statements, its income statement will report Insurance Expense that is one-sixth of the amount paid. The balance in the account Prepaid Insurance will be reduced by the amount that was debited to Insurance Expense.
Question 9. Answer : Accrued vacation pay is the amount of vacation pay which has been earned by the employee but has not yet been paid to the employee. To illustrate accrued vacation time and accrued vacation pay let's assume that the employee's contract guarantees hours of paid vacation time per year 40 hour work week times 3 weeks.
In terms of vacation time, the employee is earning 2. At December 31 the company has a liability for the vacation hours and vacation pay that the employee has earned and is entitled to if the company were to close.
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