R2R INTERVIEW QUESTION & ANSWERS

P REPA RED BY M D S AHEEM , E MAIL - M_ SAHEEM @ YAHOO . COM

Basic Accounting Questions:

1. What is the accounting equation?

• The accounting equation is Assets = Liabilities + Equity. It shows that a company’s resources (assets) are
financed either by borrowing (liabilities) or by owner’s equity.

2. What are assets?

• Assets are resources owned by a company that have economic value and are expected to provide
future benefits. Examples include cash, accounts receivable, inventory, equipment, and buildings.

3. What are liabilities?

• Liabilities are obligations or debts that a company owes to outside parties. Examples include loans,
accounts payable, and accrued expenses.

4. What is equity?
• Equity represents the owner’s residual interest in the company after deducting liabilities from assets. It
includes common stock, retained earnings, and contributed capital.

5. What is double-entry accounting?

• Double-entry accounting is a system where every financial transaction affects at least two accounts,
ensuring that the accounting equation (Assets = Liabilities + Equity) stays balanced. For every debit,
there must be a corresponding credit.

6. What is a journal entry?

• A journal entry is the recording of financial transactions in the accounting system. It includes the date
of the transaction, the accounts affected, and whether the accounts are debited or credited.

7. What is accrual accounting?

• Accrual accounting is a method of accounting where revenue is recorded when earned, and expenses
are recorded when incurred, regardless of when cash is actually received or paid.

8. What is depreciation?
• Depreciation is the process of allocating the cost of a tangible asset over its useful life. It represents the
wear and tear on assets like machinery, vehicles, or buildings over time.

9. What are prepaid expenses?

• Prepaid expenses are payments made in advance for goods or services to be received in the future.
Examples include prepaid rent or insurance.

10. What is a balance sheet?

• A balance sheet is a financial statement that shows a company’s financial position at a specific point in
time, listing its assets, liabilities, and equity.
Key Accounting Terminology:

1. Revenue: Income earned by a company from its normal business operations, such as sales of goods or services.
2. Expenses: Costs incurred in the process of generating revenue, such as salaries, rent, and utilities.
3. Accounts Payable (AP): Money a company owes to its suppliers for goods or services received but not yet paid
for.
4. Accounts Receivable (AR): Money owed to a company by its customers for goods or services delivered but not
yet paid for.
5. General Ledger (GL): A complete record of all financial transactions of a company, categorized by accounts.
6. Trial Balance: A report that lists the balances of all general ledger accounts at a particular point in time,
ensuring that debits and credits are equal.
7. Profit and Loss Statement (P&L): A financial statement that summarizes revenues, expenses, and profits over
a specific period, also known as the income statement.
8. Amortization: The gradual repayment of a loan or the process of spreading out intangible asset costs over time,
similar to depreciation for tangible assets.
9. Retained Earnings: Profits that are not distributed to shareholders but are kept in the company to reinvest in
the business or pay off debts.
10. Deferred Revenue: Money received by a company for goods or services not yet delivered; also known as
unearned revenue.

11. What are the three Golden Rules of Accounting?

1. Personal Account – Debit the receiver, Credit the giver
2. Real Account – Debit what comes in, Credit what goes out
3. Nominal Account – Debit all expenses & losses, Credit all incomes & gains

12. What are the three main types of accounts?

1. Real – All assets in business either tangible or intangible classify as real accounts.
2. Personal – Accounts related to a person, entity or any legal body, etc. are called
3. Nominal – All accounts related to expenses & losses or incomes & gains fall under this category

13. Why is Depreciation not Charged on Land?

 The reason why you will never see depreciation being charged on land is that land has
an infinite useful life. Without knowing how many years a fixed asset will last depreciation cannot be charged.
 The formula to calculate straight-line depreciation is (Cost of Fixed Asset – Scrap Value)/Useful life and you don’t
have a number to fill the denominator here.

14. What is Amortization?

 Amortization is only done for Intangible assets, unlike depreciation which is for tangible assets. Reduction in
value by prorating the cost of an intangible asset over multiple accounting periods is called amortization.

 Example – A small-sized technology company Unreal Corp. spends 500,000 on R&D which is expected to sustain
for 5 years so it may decide to amortize this & show 1,00,000 each year for 5 years in the financial statements.

15. Why is Closing Stock not Shown in Trial Balance?

 Closing stock is a part of purchases & trial balance already includes purchases, hence if the closing stock is shown
as a separate item it will double count and result in an error.

16 What are the three main Financial Statements?

 Income Statement – It presents a summarized view of revenue, income, profit, and loss of a particular
accounting period.
 Balance Sheet – B/S would show them as on date assets, liabilities & capital position of a business.
 Cash Flow Statement – It shows the movement of cash and cash equivalents for a business during an accounting
period.

17. What are Fictitious Assets?

Bind this to your memory fictitious assets are not assets they are fake or deceptive they
are actually expenses & losses which for some reason couldn’t be written off during the
accounting period incurred. They are written off in multiple future accounting periods.

Examples – Preliminary expenses, promotional expenses of a business, discount

allowed on the issue of shares, the loss incurred on issue of debentures, etc.

18. What is the Journal Entry for Goods Given in Charity?

When a business decides to give goods in charity it also needs to account for those
goods in the appropriate financial statement(s), in this case, purchases are reduced
with the exact cost of goods
donated.

Journal entry

19. What is the Journal Entry for Free Samples?

When a business wants to advertise a new product or a new line of product it may
decide to distribute free samples to the customer. In this case purchase a/c is credited
and advertisement a/c is debited.

Journal entry

20. What is Depreciation, different types of depreciation & its journal entry?
The reduction in the value of a tangible fixed asset due to normal usage, wear and tear,
new technology or unfavorable market conditions is called Depreciation

Journal entry

Types of Depreciation

● Straight Line Method

● Diminishing Value Method

● Annuity method

● Machine hour rate method

● Revaluation method

● Sum-of-the-years’ digit method

 21. What are Contingent Liabilities?
Contingent liabilities are those liabilities that may or may not be incurred by a business
depending on the outcome of a future event. The existence of this kind of liability is
completely dependent on the occurrence of a probable event in future.

Example – Let’s suppose that Apple files a case of a patent violation on Samsung and
Samsung not only realizes that it may have to pay for violations but also estimates how
much in total. In this case, Samsung will record the estimated amount in their books of
accounts as a Contingent Liability.

22 What is the difference between Reserves and Provisions?

23. What are Accruals?

Accrued Expense: is an expense which has been incurred, but has not been recorded in
the books of accounts presently. It will require an adjustment entry in the books of
accounts to reflect this in the financial statements.
Accrued Income: is an income which has been earned, but has not been recorded in the
books of accounts presently. Similar to accrued expenses, an adjustment entry will be
required in this case too.

24. What is a Contra Account?

It is an account which is used to reduce or offset the value of an associated account. It
holds the opposite sign for a particular type of account.

If an account has a debit balance (e.g for an Asset a/c), then there will be a credit
balance in its contra account. The opposite is true for a liability account.

Example for contra accounts

25. What are Drawings, what type of account is it & its journal entry?
When a proprietor withdraws cash or goods from its own business for personal use it is
termed as drawings. It reduces capital invested and is a temporary account which is
cleared at the end of each accounting period.

“Drawings” is a Personal Account & is shown on the liability side of a balance sheet.
Journal entry for cash withdrawn

Journal entry for goods withdrawn

26. What is a Bank Reconciliation Statement &

why is it prepared?
Almost all compilations of finance and accounting interview questions include at least
one question on BRS, this topic is deemed important.
Bank Reconciliation Statement or BRS refers to a statement which is made to reconcile
bank balance shown on the bank statement or passbook with the bank balance shown
in the cash book.
Both internal sources i.e. the cash book and external source i.e. the bank
statement/passbook are reconciled with each other, then all the mismatches are
identified and properly recorded.

Reasons for preparing a BRS

27. What is Deferred Revenue Expenditure?

Another one among the list of commonly asked finance and accounting interview
questions is Deferred Revenue Expenditure. It is an expenditure which is revenue in
nature and incurred during an accounting period, but its benefits are to be derived
from a number of following accounting periods.
The part of the amount which is charged to the profit and loss account in the current
accounting period is reduced from the total expenditure and the rest is shown on the
balance sheet as an asset.

Example – A small business spends 1,50,000 on advertising which is unusually large for
them. The benefits from it are expected to be derived over 3 years so the company
decides to divide the expense over 3 yearly payments of 50K. This type of expense is
amortized. +
28. What is the difference between Trade Discount & Cash Discount?

29. What is a Credit Note and Debit Note?

Be ready for this question in accounting interviews for roles related to Accounts Payable
and Accounts Receivable.
Debit Note – When a buyer returns goods to the seller, he sends a debit note as an
intimation to the seller of the amount and quantity being returned and requesting the
return of money.
Credit Note – When a seller receives goods (returned) from the buyer, he prepares and
sends a credit note as an intimation to the buyer showing that the money for the related
goods is being returned in the form of a credit note.

30. How many types of business transactions are there in accounting?

Ans. There are two types of business transactions in accounting – revenue and capital.

31. Explain real and nominal accounts with examples.

Ans. A real account is an account of assets and liabilities. E.g. land account, building account, etc. A nominal
account is an account of income and expenses. E.g. salary account, wages account, etc.

32. Which accounting platforms have you worked on? Which one do you prefer the most?
Ans. Describe the accounting platforms (QuickBooks, Microsoft Dynamic GP, etc.) that you have worked with and
which one you liked the most.

33. What is double-entry bookkeeping? What are the rules associated with it?
Ans. Double-entry bookkeeping is an accounting principle where every debit has a corresponding credit. Thus,
the total debit amount is always equal to the total credit. In this system, when one account is debited then
another account gets credited at the same time.

34. What is working capital?

Ans. Working capital is calculated as current assets minus current liabilities, which is used in day-to-day trading.

35. How do you maintain accounting accuracy?

Ans. Maintaining the accuracy of an organisation’s accounting is an important activity as it can result in a huge
loss. There are various tools and resources which can be used to limit the potential for errors to creep in and
address quickly if any errors do arise.

36. What is TDS? Where do you show TDS on a balance sheet?

Ans. TDS (Tax Deducted at Source) is a concept aimed at collecting tax at every source of income. In a balance
sheet, it is shown in the assets section, right after the head current asset.

37. What is the difference between ‘accounts payable (AP)’ and ‘accounts receivable
(AR)’?
Ans.
Accounts Payable Accounts Receivable

The amount a company owes because it The amount a company has the right to collect because it
purchased goods or services on credit from a sold goods or services on credit to a customer.
vendor or supplier.

Accounts payable are liabilities. Accounts receivable are assets.

38. What is the difference between a trial balance and a balance sheet?
Ans. A trial balance is the list of all balances in a ledger account and is used to check the arithmetical accuracy in
recording and posting. A balance sheet, on the other hand, is a statement that shows the assets, liabilities, and
equity of a company and is used to ascertain its financial position on a particular date.

39. Is it possible for a company to show positive cash flows and still be in grave trouble?
Ans. Yes, if it shows an unsustainable improvement in working capital and involves a lack of revenue going
forward in the pipeline.

40. What are the common errors in accounting?

Ans. The common errors in accounting are – errors of omission, errors of commission, errors of principle, and
compensating error.

41. What is the difference between inactive and dormant accounts?

Ans. Inactive accounts are which are closed and will not be used in the future. Dormant accounts are not
currently functional but may be used in the future.

42. Are you familiar with the Accounting Standards? How many accounting standards are
there in India? [Frequently asked accounting interview question]
Ans. There are currently 41 Accounting Standards which are usually issued by the Accounting Standards Board
(ASB).

43. Why do you think Accounting Standards are mandatory?

Ans. Accounting Standards play an important role in preparing a good and accurate financial report. It ensures
reliability and relevance in financial reports.

44. What are some of the ways to estimate bad debts?

Ans. Some of the popular ways of estimating bad debts are – the percentage of outstanding accounts, aging
analysis, and percentage of credit sales.

45. What is deferred tax liability?

Ans. Deferred tax liability signifies that a company may pay more tax in the future due to current transactions.

46. What is a deferred tax asset and how is the value created?
 Ans. A deferred tax asset is when the tax amount has been paid or has been carried forward but has still not
been recognized in the income statement. The value is created by taking the difference between the book
income and the taxable income

47. What is the equation for Acid-Test Ratio in accounting?

Ans. The equation for Acid-Test Ratio in accounting
Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities

48. What is an MIS report, have you prepared any?

Ans. Yes, I have prepared MIS reports. It is an acronym for Management Information System, and this report is
generated to identify the efficiency of any department of a company.

49. What is Marginal Cost?

Ans. If there is an increase in the number of units produced, the total cost of output is changed. Marginal cost is
that change in the cost of an additional unit of output.

50. What is GAAP?

Ans. GAAP is the abbreviation for Generally Accepted Accounting Principles (GAAP) issued by the Institute of
Chartered Accountants of India (ICAI) and the provisions of the Companies Act, 1956. It is a cluster of accounting
standards and common industry usage, and it is used by organizations to:
 Record their financial information properly
 Summarize accounting records into financial statements
 Disclose information whenever required

51. What is the difference between accounts receivable and deferred revenue?
Ans. Accounts receivable is yet-to-be received cash from products or services that are already sold/delivered
customers, whereas, deferred revenue is the cash received from customers for services or goods not yet
delivered.

52. What is compound journal entry?

Ans. A compound journal entry is just like other accounting entries; the only difference is that it affects more than
two account heads. The compound journal entry has one debit, more than one credits, or more than one of both
debits and credits.

53. What is reversing journal entries?

Ans. Reversing entries refer to the journal entries that are made when an accounting period starts. These entries
reverse or cancel the adjusting journal entries that were made at the end of the previous accounting period.

54. What are errors of commission?

Errors of commission that arise due to –
- Wrong recording, errors of posting- (these does not affect agreement of trial balance)
- Wrong casting (subsidiary books), wrong carry forward, wrong balancing – (these affect T.B.)

55. What is a Suspense A/c ?

A Suspense A/c is an account in which the amount of difference in Trial balance is posted till such time
errors are identified and rectification entries are posted.
A Suspense account is an outcome of accounting errors that affect trial balance. Normally a Suspense
account should stand balanced after all errors have been rectified after before preparation of Balance sheet.

30. What is the difference between Trade discount and Cash discount?
 Trade Discount Cash Discount

 It is given to promote Sales It is given to encourage prompt payment

 It is reduced from the list price It is reduced from the Invoice price
 It is shown by way of deduction from Invoice It is not shown on Invoice
 It is not account for in ledger It is accounted for in ledgers (Cash book)

Journal Entries

If Purchase is made from Mr Kumar for list price Rs. 1,00,000 and trade discount is of 10% also cash discount given is 2%.
Please give the journal entry?

Purchase A/c - debit 90,000

Cash - credit 88,200

Discount A/c - credit 1,800

If Purchase is made from Mr Kumar for list price Rs. 1,00,000 and trade discount is of 10% also cash discount given is 1%.
Half of the amount was paid by cheque Immediately. Please give the journal entry?

Purchase A/c - debit 90,000

Mr. Kumar/ AR A/c - credit 45,000

Bank - credit 44,550

Discount A/c - credit 450

If Asset was purchased or historical cost of asset was Rs. 50,000; Accumulated depreciation is Rs. 35,000. If the Asset is
disposed what is the journal entry?

Accumulated Depreciation A/c - debit 35,000

Loss of Asset disposal A/c - debit 15,000

Asset A/c - credit 50,000

If in the above situation the Asset is sold for Rs. 20,000 what will be the J. Entry?

Bank A/c - debit 20,000

Accumulated Depreciation A/c - debit 35,000

Profit on sale of Asset A/c - credit 5,000

Asset A/c - credit 50,000

In an Intercompany transaction Altd. Purchases Fixed Assets Rs. 50,000 for & on behalf of sister company Bltd.
Journalise the transaction-

In the books of Altd.-

Bltd‟s A/c - debit 50,000

Bank A/c - credit 50,000

In the books of Bltd. –

Fixed Asset A/c - debit 50,000

Altd. A/c - credit 50,000

Goods/ stock of Rs. 30,000 were destroyed in fire and Insurance company admits 60% of the claimed value-

Loss of stock due to fire A/c - debit 12,000

Insurance Company A/c - debit 18,000

Purchase A/c - credit 30,000

Profit & Loss A/c - debit 12,000

Loss of stock due to fire - credit 12,000

If in the above question salvage value of stock is 5,000 what will be the journal-

Cash A/c - debit 5,000

Loss of stock due to fire A/c - debit 7,000

Insurance Company A/c - debit 18,000

Purchase A/c - credit 30,000

Provide Journal Entries for creating Deferred tax Assets and Deferred tax liabilities.

Deferred Tax Assets Account Debit

To Profit & Loss Account Credit

Profit & Loss Account Debit

To Deferred Tax Liabilities Credit

Short Notes
Reconciled item -

Variance has been itemized and root cause has been established

Open Item -

Open item is an item of variance, which requires an action to remove the balance from the account.

Recorded Item -

An item of variance which does not require an action to remove the balance from the account is

called as Recorded item

Aged Open Item -

 If an open item is not resolved or action not taken within a required time frame (quarter) it is termed as an Aged
open item.
 Aged open item result an account as Un-reconciled.
  Normally open items should be resolved in the quarter these are identified.

Un-reconciled Item -

It is an item of variance for which the reason is not yet identified or is yet to be reconciled

What is the importance of having Cash/ Bank reconciliation?

a. Keeps control over cash disbursements.
b. Helps detect and prevent fraudulent activities.
c. Ensures accuracy of Cash / Bank accounts while reporting B/S
d. Helps to assess cash position & cash planning

What are inter-company transactions? Why is intercompany reconciliation important?

 Inter-company transactions are those that happen between two legal entities within same group.
 Intra company transactions that two business units within a legal entity.
 Intercompany reconciliation is important at the time of group consolidation.
 Intercompany reconciliation requires GL to SL recs & third-party recs between entities, objective is to :
a) Eliminate difference in Intercompany balances both short term and long term
b) Eliminate Unrealized gains on intercompany transactions e.g. sale- purchase, dividend etc.
c) 94. Give some examples that cause difference in Bank Reconciliation.

Differences

Timing differences: -

 Check deposited but not cleared

 Check paid but not presented for payment
 Interest credited or charged by Bank not entered in cash book.

Error of recording: -

 a. Check paid of Rs, 1600 was recorded in Cash book for Rs 1060.
 b. Check received from a customer and deposited in bank was recorded on credit side of the cash book

Purpose of reconciliations?

 Accuracy – of the GL balances

 Integrity -of financial statements.
 Reliability –Data given to regulatory authorities is true.
 Control – detecting & preventing financial misstatements.

Why is reconciliation necessary? i.e. significance of reconciliation-

- Good accounting process
- Mandatory in compliance with Sarbanes Oxley
- Internal control measure
 How is it performed i.e. please give steps?

- To compare two set of records originating from different sources or systems

- verifying General Ledger (GL) account balances with supporting documents
- Investigating the differences
- Identifying the underlying causes
- Rectifying & reporting them

Accounting Principal & Concepts

1. Accrual Principle
• Concept: Revenues and expenses are recorded when they are earned or incurred, not when cash is
received or paid

Example: If services are provided in September, the revenue is recorded in September, even if payment is received in
October.

Journal Entry Example:

Sep 15: Service provided but cash not received yet.
• Debit: Accounts Receivable $1,000
• Credit: Service Revenue $1,000

2. Consistency Principle
• Concept: A company should use the same accounting methods from period to period for consistency in
financial reporting.

Example: If a company uses the straight-line method for depreciation, it should continue using it unless a valid reason for
a change is given.

3. Conservatism Principle
• Concept: Record expenses and liabilities as soon as possible, but only record revenues when they are certain.

Example: If there’s uncertainty whether a customer will pay, you should record a potential loss (bad debt) rather than
waiting for them to not pay.

Journal Entry Example:

• Debit: Bad Debt Expense $200

• Credit: Allowance for Doubtful Accounts $200

4. Matching Principle
• Concept: Expenses should be recognized in the same period as the revenue they help generate.

Example: If a company sells products in September but pays for advertising in July, the advertising expense should be
recorded in September when the related revenue is earned.

Journal Entry Example:

 Jul 31: Prepaid advertising recorded.

• Debit: Prepaid Expense $500

• Credit: Cash $500

Sep 30: Advertising expense recognized in the month revenue is earned.

• Debit: Advertising Expense $500

• Credit: Prepaid Expense $500

5. Revenue Recognition Principle

• Concept: Revenue is recognized when it is earned, not necessarily when cash is received.

Example: A company delivers goods on September 1st, but payment is not received until October 1st. The revenue is
recognized in September.

Journal Entry Example:

Sep 1: Goods delivered.

• Debit: Accounts Receivable $2,000

• Credit: Sales Revenue $2,000

6. Historical Cost Principle

• Concept: Assets should be recorded at their purchase cost, not at their current market value.

Example: If a company purchases equipment for $10,000, it will be recorded at $10,000, even if the market value changes
over time.

Journal Entry Example:

• Debit: Equipment $10,000

• Credit: Cash $10,000

7. Materiality Principle
•Concept: Only items that would affect the decision-making process of a reasonable person need to be recorded. Small
amounts can be ignored if they do not materially impact financial statements.

Example: A company might expense a $50 printer instead of capitalizing it as an asset due to its immaterial value.
Journal Entry Example:

• Debit: Office Supplies Expense $50

• Credit: Cash $50

8. Going Concern Principle

• Concept: Assumes that a company will continue its operations in the foreseeable future, meaning it will not liquidate or
close down.

Example: Even if a company has financial issues, assets are still recorded at cost rather than liquidation values.
Journal Entry Example:

• No specific journal entry – This is more of a reporting assumption.

9. Full Disclosure Principle
•Concept: All information that affects the understanding of a company’s financial position must be disclosed, either in the
financial statements or the notes.

Example: A lawsuit pending against the company must be disclosed in the notes to the financial statements,
even if it hasn’t been resolved.

Journal Entry Example:

• No specific journal entry – Disclosures are included in footnotes, not journal entries.

10. Economic Entity Principle

•Concept: The business’s transactions must be kept separate from those of the owners or other businesses.

Example: If the owner of a business purchases personal items, those expenses should not be recorded in the business’s
financial records.

Journal Entry Example:

Personal expense paid using company funds:

• Debit: Drawings $1,000

• Credit: Cash $1,000

11. Time Period Principle

•Concept: Financial reporting should be done over standard time periods such as monthly, quarterly, or annually.

Example: A company must prepare monthly financial statements, even though the business might operate
continuously.

Journal Entry Example:

• No specific journal entry – This is about reporting periods.

12. Monetary Unit Principle

•Concept: All transactions should be recorded in a consistent currency and assume that the currency remains stable over
time.

Example: A company operating in the U.S. records all its transactions in U.S. dollars, regardless of where the transactions
occurred.

Journal Entry Example:

• All entries are recorded in the currency of the country where the business operates.

13. Realization Principle

•Concept: Revenue is recognized when goods are delivered or services are provided, regardless of when cash is received.

Example: If a company delivers goods in December but receives payment in January, revenue is recognized in December.
Journal Entry Example:

• Debit: Accounts Receivable $5,000

 • Credit: Sales Revenue $5,000

14. Cost-Benefit Principle

•Concept: The benefits of providing financial information should outweigh the costs. If the cost of reporting certain
information is too high and the benefit is minimal, the information does not need to be disclosed.

•Example: If a company spends a large amount to track a very minor asset, it might skip tracking this information to avoid
high costs.

15. Prudence Principle

•Concept: Recognize expenses and liabilities as soon as possible, but only recognize revenues when they are assured. The
principle guides businesses to err on the side of caution when making estimates or judgements.

Example: A company anticipates potential warranty expenses and records an estimated liability even before customers
claim it.

Journal Entry Example:

• Debit: Warranty Expense $300

• Credit: Warranty Liability $300

16. Dual Aspect Principle

•Concept: Every transaction affects at least two accounts in the accounting records, which is the basis of the double-entry
system.

Example: If a company buys furniture for $2,000 in cash, both the cash and asset accounts are affected.

Journal Entry Example:

• Debit: Furniture $2,000

• Credit: Cash $2,000

What is Deferred Acquisition Cost (DAC)

DAC works by recording acquisition costs as an intangible asset on the balance sheet, then amortizing them throughout the
contract. In other words, it works by capitalizing on the acquisition expense and straight-lining it to zero when the contract
terminates. Thus, insurers accumulate all the costs they incur to acquire a new customer in an asset account called
Deferred Acquisition Costs.

Example: You are an accounting intern at Savers Insurance Group, and you were asked to account for the projected
income of Mr. Smith, a newly acquired customer, over the contract periods.

Mr. Smith signed a contract with your firm for a health insurance product over twelve months. You agreed upon a monthly
premium payment of $400.

DAC will include the following costs:

Acquiring costs: $1,500

Office expenses: $500

Fixed Asset Impairment & Journal entry
Sometimes, there is a sudden drop of the fair value of the fixed asset which leads to the impairment that the company
cannot ignore. Likewise, if that happens, the company needs to make the fixed asset impairment journal entry in order to
record the loss as a result of impairment in the income statement. There are various reasons that could lead to a sudden
drop of the fair value of the fixed asset, including the negative changes in technology, obsolescence, physical damage, or a
significant decline of market value

Fixed asset impairment example

For example, due to one of its machines has become obsolete, the company ABC needs to recognize a loss of $50,000 as a
result of impairment as of December 31, in order to comply with the accounting standards.

In this case, the company ABC needs to make the fixed asset impairment journal entry for the impairment loss of $50,000
due to obsolescence of its machine as below:

Account Debit Credit

Impairment losses 50,000

Accumulated impairment losses 50,000

Intercompany Accounting:
Intercompany accounting refers to the process of recording financial transactions between related entities within the same
group of companies. It ensures that transactions between parent and subsidiary companies, or between sister companies,
are recorded accurately and eliminated during the preparation of consolidated financial statements to avoid double
counting.

Key Elements of Intercompany Accounting:

• Intercompany Sales/Purchases*: When one company within the group sells goods or services to
another.
• Intercompany Loans*: Loans or advances between companies within the same group.
• Intercompany Charges*: Shared services like management fees, IT support, or other expenses.
• Eliminations*: When preparing consolidated financial statements, intercompany transactions must be
eliminated to avoid overstating revenue, expenses, or balances.

Significance of Intercompany Accounting:

• - Ensures accuracy in *consolidated financial reporting*.

• - Prevents *double counting* of revenue, expenses, or balances.
• - Helps maintain proper tracking of *related party transactions*.
• - Ensures compliance with *accounting standards* like IFRS or GAAP.

Intercompany Journal Entry Examples:

1.Intercompany Sale of Goods:

 Selling Entity (Company A)*:

- Debit: Accounts Receivable (Company B) $10,000

- Credit: Sales Revenue $10,000

Purchasing Entity (Company B)

- Debit: Inventory $10,000

- Credit: Accounts Payable (Company A) $10,000

2. Intercompany Loan:
Lending Entity (Company A:

- Debit: Loan Receivable (Company B) $50,000

- Credit: Cash $50,000

Borrowing Entity (Company B):

- Debit: Cash $50,000

- Credit: Loan Payable (Company A) $50,000

3. *Intercompany Management Fees*:

- *Charging Entity (Company A)*:

- - Debit: Accounts Receivable (Company B) $5,000

- - Credit: Management Fee Revenue $5,000

- *Receiving Entity (Company B)*:

- - Debit: Management Fee Expense $5,000

- - Credit: Accounts Payable (Company A) $5,000

*Elimination Entry (in Consolidated Financials)

- - Debit: Sales Revenue $10,000

- - Credit: Cost of Goods Sold (COGS) $10,000

GAAP
Generally Accepted Accounting Principles, or GAAP, refers to the principles used in accounts throughout the U.S. The
principles allow a fairer and simpler comparison between the financial positions of different companies. Several
organizations contribute to the development of GAAP, most notably the Financial Accounting Standards Board. Though
GAAP is not legally binding in itself, the Securities and Exchange Commission requires that all publicly-traded companies
follow the principles
SAP
Stat is short for statutory accounting. This means following the Statutory Accounting Principles, or SAP, which is not a static
document but a series of documents issued by the National Association of Insurance Commissioners, or NAIC. As well as
amending or replacing existing rules, these documents can introduce rules for issues that the NAIC has not previously
addressed. An example would be how to deal with a new type of intangible asset like an internet site. Insurance firms must
use SAP when preparing filings for state regulators. The main focus of SAP is that financial statements should show the
current liquidity of a company -- the contrast between its assets and liabilities. The aim is to show how well protected
customer deposits are should a company experience financial difficulties.

Industry Difference

It is mandatory for all the companies in the United States to use GAAP. When the companies file their financial reports,
they are required by the Security and Exchange Commission of the U.S. to follow these Generally Accepted Accounting
Principles. Financial Accounting Standards Board, also known as FASB, set the GAAP rules and accounting standards. These
rules are same everywhere in the U.S., which makes it easier for investors to compare the financial information of different
companies using the same set of principles. Statutory Accounting, on the other hand, is specific to insurance companies.

Purpose of Accounting Principles

Financial statements of the insurance companies are prepared under the guidelines of statutory accounting and this
financial information helps investors to see whether insurers are in a position to pay insurance claims. Moreover, it allows
investors to assess the total worth of an insurance company in case the company ceases its operations. On the contrary, an
entity is considered as a going concern as per GAAP. Therefore, financial statements are prepared on the basis of matching
concept and investors can measure the profitability of a business. It also allows investors to assess the value of a company
and compare its future and present value.

Value of Asset

The financial statements prepared under Statutory Accounting and the financial statements prepared under GAAP have
different purpose. Statements prepared under the statutory accounting are used to find the current value of a company,
and therefore, it doesn’t include a lot of non-liquid and intangible assets. For example, goodwill, supplies,
furniture, tax credit etc., are not included in the financial statements of SAP. But, under the GAAP rules, these items form
part of the financial statements under the category of asset, which increases the overall value of the asset.

Matching Principle

GAAP follows matching principle when preparing the financial statements of the companies, but in Statutory Accounting,
no matching principle is followed. The matching principle allows an entity to record the expense related to a product only
when the sale of the product is recorded in the financial statements. For example, if a company books its quarterly sales,
the expense related to those sales is apportioned on a quarterly basis to match the quarterly earnings. But in the case of
statutory accounting, insurance companies have to book the expenses as they occur.

Value of Equity

The value of the entity is recorded as stockholder equity under GAAP, whereas in case of statutory accounting, it is
recorded under statutory policyholder surplus. The value recorded in statutory policyholder surplus is not the same as
stockholder’s equity because statutory accounting has strict rules related to recording the assets, and the net income of an
insurance company is calculated differently as compared to the calculation of net income under GAAP.

Read more: Difference between GAAP and Statutory Accounting | Difference

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