Below is a curated list of the 50 most common questions asked online about accounting, bookkeeping, and finance, with detailed answers provided by a professional accountant, CPA, or CFO. These questions cover foundational concepts, practical applications, and advanced topics relevant to small business owners, students, and professionals.
1. What is the difference between accounting and bookkeeping?
Answer: Bookkeeping involves the systematic recording, organizing, and maintaining of financial transactions, such as sales, purchases, and payments, in a company’s general ledger. It focuses on data entry and ensuring accurate records, often using tools like QuickBooks or Excel. Accounting, however, encompasses bookkeeping but extends to analyzing, interpreting, and summarizing financial data to prepare financial statements, budgets, and tax returns. As a CPA, I’d emphasize that bookkeeping is tactical (e.g., recording a $500 deposit), while accounting is strategic (e.g., analyzing cash flow to advise on business expansion). For example, a bookkeeper records a sale, while an accountant determines its impact on profitability.
2. What is double-entry bookkeeping?
Answer: Double-entry bookkeeping is a fundamental accounting principle where every financial transaction is recorded in at least two accounts: one as a debit and one as a credit, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced. For instance, if a business receives $1,000 in cash for services, it debits Cash (asset) by $1,000 and credits Revenue (equity) by $1,000. This system prevents errors and ensures accuracy, as total debits must equal total credits. As a CFO, I rely on double-entry to maintain reliable financial records, which is critical for audits and compliance with GAAP.
3. What is the accounting equation?
Answer: The accounting equation is Assets = Liabilities + Equity. It’s the cornerstone of double-entry bookkeeping, ensuring a company’s financial position is always balanced. Assets (e.g., cash, inventory) are resources owned by the business. Liabilities (e.g., loans, accounts payable) are obligations owed to others. Equity represents the owner’s stake, including capital and retained earnings. For example, if a business buys equipment for $10,000 with a $5,000 loan and $5,000 cash, Assets (Equipment +$10,000, Cash -$5,000) equal Liabilities (+$5,000 loan) plus Equity (unchanged). As a CPA, I use this equation to verify balance sheets and assess financial health.
4. What are the three main financial statements?
Answer: The three core financial statements are the Balance Sheet, Income Statement, and Cash Flow Statement. The Balance Sheet shows a company’s financial position at a point in time, detailing assets, liabilities, and equity (e.g., $50,000 cash, $20,000 loans, $30,000 equity). The Income Statement (or P&L) summarizes revenues, expenses, and net income over a period (e.g., $100,000 revenue – $70,000 expenses = $30,000 profit). The Cash Flow Statement tracks cash inflows and outflows from operating, investing, and financing activities. As a CFO, I use these statements to evaluate performance, liquidity, and solvency, ensuring stakeholders have clear insights.
5. What is the difference between accounts payable and accounts receivable?
Answer: Accounts Payable (AP) represents money a business owes to suppliers for goods or services purchased on credit (a liability). For example, if you buy $2,000 of office supplies on 30-day terms, you record $2,000 in AP. Accounts Receivable (AR) is money owed to the business by customers for goods or services sold on credit (an asset). For instance, if you invoice a client $5,000 for consulting, you record $5,000 in AR. As a CPA, I monitor AP to manage cash outflows and AR to ensure timely collections, impacting cash flow and working capital.
6. What is accrual accounting vs. cash accounting?
Answer: Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash changes hands. For example, if you perform services in December but get paid in January, you record revenue in December. Cash accounting records revenue and expenses only when cash is received or paid. Small businesses often use cash accounting for simplicity, but accrual accounting, required by GAAP for larger firms, provides a more accurate financial picture. As a CFO, I recommend accrual accounting for businesses with complex transactions to match revenues with expenses accurately.
7. What is a trial balance?
Answer: A trial balance is a report listing the balances of all general ledger accounts at a specific point in time to verify that total debits equal total credits, ensuring the books are balanced. For example, if your ledger shows $10,000 in Cash (debit), $5,000 in Accounts Payable (credit), and $5,000 in Equity (credit), the trial balance confirms debits ($10,000) equal credits ($10,000). As a CPA, I use trial balances to catch errors before preparing financial statements, though it doesn’t detect all errors (e.g., misclassifications).
8. What is depreciation, and how is it calculated?
Answer: Depreciation allocates the cost of a tangible asset (e.g., equipment) over its useful life, reflecting wear and tear. Common methods include Straight-Line (Depreciation = (Cost – Salvage Value) / Useful Life) and Double-Declining Balance (accelerated depreciation). For example, a $10,000 machine with a 5-year life and $2,000 salvage value has annual straight-line depreciation of ($10,000 – $2,000) / 5 = $1,600. As a CFO, I choose depreciation methods based on tax strategy (e.g., MACRS for tax purposes) and GAAP compliance (e.g., straight-line).
9. What is a general ledger?
Answer: A general ledger is a comprehensive record of all financial transactions, organized by accounts (e.g., Cash, Revenue, Expenses). Each transaction is recorded as a journal entry with debits and credits, then posted to the appropriate ledger accounts. For example, a $1,000 sale increases Cash (debit) and Revenue (credit). As a CPA, I rely on the general ledger to prepare financial statements and ensure accuracy, as it serves as the foundation for all accounting records. Automated tools like QuickBooks streamline ledger management.
10. What is the purpose of financial statements?
Answer: Financial statements provide a snapshot of a company’s financial performance and position, used by management, investors, and regulators. The Balance Sheet shows financial stability (assets vs. liabilities). The Income Statement reveals profitability (revenue vs. expenses). The Cash Flow Statement tracks liquidity (cash inflows/outflows). For example, a business with $100,000 revenue and $80,000 expenses shows $20,000 profit on the Income Statement, guiding decisions like expansion or cost-cutting. As a CFO, I use these statements for strategic planning, compliance, and stakeholder communication.
11–50: Additional Questions with Concise Answers
Below are the remaining 40 questions with brief, professional answers. Let me know if you need detailed responses for any specific question.
- What is a journal entry?
A record of a financial transaction in chronological order, showing debits and credits (e.g., debit Cash $500, credit Revenue $500 for a sale). Essential for accurate record-keeping. - What is a balance sheet?
A snapshot of a company’s assets, liabilities, and equity at a specific time, showing financial position (e.g., $50,000 assets = $20,000 liabilities + $30,000 equity). - What is an income statement?
Summarizes revenues, expenses, and net income over a period, showing profitability (e.g., $100,000 revenue – $70,000 expenses = $30,000 profit). - What is a cash flow statement?
Tracks cash inflows/outflows from operating, investing, and financing activities, showing liquidity (e.g., $10,000 cash from sales, -$5,000 for equipment). - What is GAAP?
Generally Accepted Accounting Principles, a set of U.S. standards for consistent financial reporting, ensuring transparency and comparability. - What is a chart of accounts?
A master list of all accounts in a general ledger, categorized into assets, liabilities, equity, revenues, and expenses. - What is cost of goods sold (COGS)?
Direct costs of producing goods sold (e.g., materials, labor). For a $10,000 product, COGS might be $6,000, impacting gross profit. - What is working capital?
Current Assets – Current Liabilities, representing funds for daily operations (e.g., $20,000 cash – $10,000 payables = $10,000). - What is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization, measuring operational profitability (e.g., $50,000 revenue – $30,000 expenses = $20,000 EBITDA). - What is a cash discount?
A reduction offered to encourage early payment within a specified period (e.g., 2% off if paid within 10 days). Recorded in Sales Discounts or Purchase Discounts. - What is a purchase return?
Goods returned to a supplier, reducing Accounts Payable and inventory (e.g., debit Accounts Payable $500, credit Inventory $500). - What is the difference between financial and managerial accounting?
Financial accounting reports historical data for external stakeholders (e.g., balance sheets). Managerial accounting provides internal data for decision-making (e.g., budgets). - What is a deferred revenue?
Cash received for goods/services not yet delivered, recorded as a liability (e.g., $1,000 subscription paid in advance). - What is a bank reconciliation?
Comparing company records to bank statements to identify discrepancies (e.g., outstanding checks or deposits in transit). Ensures accurate cash balances. - What is the break-even point?
The sales level where revenue equals expenses (e.g., Fixed Costs ÷ Contribution Margin per Unit). Guides pricing and cost decisions. - What is a nominal account?
Temporary accounts for revenues and expenses (e.g., Sales, Rent Expense), closed to equity at period-end. - What is the revenue recognition principle?
Revenue is recorded when earned, not when cash is received (e.g., record $5,000 sale when services are performed). - What is a contingent liability?
A potential obligation dependent on a future event (e.g., a pending lawsuit). Disclosed in financial statement notes. - What is a fixed asset?
Long-term assets used in operations (e.g., equipment, buildings), depreciated over time. - What is an intangible asset?
Non-physical assets like patents or trademarks, amortized over their useful life. - What is a trial balance vs. a balance sheet?
Trial balance verifies debit/credit equality; balance sheet shows assets, liabilities, and equity. - What is the purpose of an audit?
To examine financial records for accuracy and compliance, ensuring transparency (e.g., IRS reviews for discrepancies). - What is a general journal?
A chronological record of all transactions before posting to the general ledger. - What is the accrual basis of accounting?
Records revenues/expenses when earned/incurred, not when cash is exchanged, per GAAP. - What is a credit note?
A document issued to reduce a customer’s invoice due to returns or errors (e.g., $100 credit for defective goods). - What is a debit note?
A notice sent to a supplier indicating a reduction in their invoice (e.g., for returned goods). - What is the difference between public and private accounting?
Public accounting serves multiple clients (e.g., audits, tax prep); private accounting works internally for one company (e.g., budgeting). - What is a T-account?
A visual tool showing debits (left) and credits (right) for an account (e.g., Cash: $1,000 debit, $500 credit). - What is the role of a CPA?
A Certified Public Accountant prepares financial statements, conducts audits, and ensures tax compliance, requiring licensure and expertise. - What is VAT?
Value Added Tax, a consumption tax on a product’s sales price, added at each production stage. - What is a reversing entry?
An entry made at the start of a period to reverse a prior accrual (e.g., reversing accrued expenses after payment). - What is inventory valuation?
Assigning value to inventory (e.g., FIFO, LIFO) to calculate COGS and assets. FIFO reflects current market values. - What is a cash book?
A record of all cash transactions, used in single-entry bookkeeping for small businesses. - What is the difference between single-entry and double-entry bookkeeping?
Single-entry records transactions once (e.g., in a cash book); double-entry records debits and credits for balance. - What is a financial ratio?
A metric (e.g., Current Ratio = Current Assets ÷ Current Liabilities) to assess financial health. - What is a budget?
A financial plan outlining expected revenues and expenses, used for cost control and planning. - What is an ERP system in accounting?
Enterprise Resource Planning software (e.g., SAP, Oracle) integrates accounting with other business functions for efficiency. - What is the cost objective in accounting?
Recording all costs to determine profit/loss and control expenses (e.g., tracking $10,000 in production costs). - What is the difference between a journal and a ledger?
A journal records transactions chronologically; a ledger summarizes them by account for financial statements. - How do you ensure accuracy in accounting?
Use double-entry bookkeeping, regular reconciliations, accounting software (e.g., QuickBooks), and audits to minimize errors.
