Journal Entries Interview Questions and Answers

A journal entry in accounting is a record of a financial transaction that is entered into the general ledger. It represents the first step in the accounting cycle and captures the details of the transaction, including the accounts involved, the amounts debited or credited, and any additional information necessary to describe the transaction. Journal entries are typically recorded in chronological order and serve as a foundation for preparing financial statements and analysing business transactions.

Here are the seven important types of journal entries used in accounting:

Simple Entry: A basic journal entry involving a single debit and credit, usually used to record straightforward transactions like cash sales or purchases.

Compound Entry: A journal entry involving multiple debits and/or credits, used for more complex transactions that affect multiple accounts simultaneously.

Opening Entry: An entry made at the beginning of an accounting period to record the balances of various accounts brought forward from the previous period.

Transfer Entries: Entries made to transfer balances from one account to another, such as transferring funds from one bank account to another or reallocating costs between departments.

Closing Entries: Entries made at the end of an accounting period to close temporary accounts (such as revenue and expense accounts) and transfer their balances to the retained earnings account.

Adjustment Entries: Entries made at the end of an accounting period to adjust accounts for accruals, deferrals, depreciation, or other adjustments needed to ensure accurate financial reporting.

Rectifying Entries: Entries made to correct errors or mistakes in previously recorded journal entries, helping to rectify the financial records and ensure accuracy.

These seven types of journal entries cover a wide range of transactions and adjustments commonly encountered in accounting processes.

Journal entries are used in various stages of the accounting process to record and track business transactions. Here are some specific instances where journal entries are used and why:

Initial Recording: Journal entries are used to initially record business transactions. This helps maintain a systematic and accurate record of all financial activities in the general ledger.

Adjusting Entries: Journal entries are used to make adjustments at the end of an accounting period to ensure that financial statements reflect the correct financial position and results. Adjusting entries can include accruals, deferrals, depreciation, and other necessary adjustments.

Closing Entries: Journal entries are used to close temporary accounts, such as revenue and expense accounts, at the end of an accounting period. This process helps transfer the balances to the retained earnings account and prepares the accounts for the next period.

Rectifying Errors: Journal entries are used to correct errors or mistakes in previously recorded transactions. These entries help rectify any inaccuracies in the financial records and ensure that the financial statements present a true and fair view.

Special Transactions: Journal entries are used for special transactions that may not fit the regular recording process. Examples include recording the issuance of stock, loan transactions, adjustments for foreign currency transactions, or other unique events that require specific journal entries.

By using journal entries, businesses can maintain accurate and detailed records of their financial transactions. Journal entries provide a chronological and comprehensive trail of all business activities, making it easier to analyse financial data, prepare financial statements, and comply with accounting standards and regulations.

Debit: Debit refers to an entry made on the left side of an account in the general ledger. It represents an increase in assets, expenses, or losses and a decrease in liabilities, equity, or revenue. Debits are typically used to record the receipt of assets, payments made, or expenses incurred.

Credit: Credit refers to an entry made on the right side of an account in the general ledger. It represents an increase in liabilities, equity, or revenue and a decrease in assets, expenses, or losses. Credits are generally used to record the provision of goods or services, receipt of income, or an increase in liabilities.

A ledger can be referred as an accounting book that keeps the record of journal entries in a chronological order to individual accounts. The process of recording this journal entries is known as posting.

The general ledger is the central accounting record that contains all the financial transactions of a company. It serves as a comprehensive repository of all accounts, including assets, liabilities, equity, revenue, and expenses. The general ledger provides a detailed and organized overview of the company’s financial activities and is used to prepare financial statements and reports. It is typically maintained using double-entry bookkeeping, where each transaction is recorded with a debit and credit entry in the appropriate accounts within the general ledger.

Auditing and accounting are two distinct but interconnected disciplines in the field of finance. Here are the key differences between auditing and accounting:

Accounting:

Accounting involves the recording, summarizing, analysing, and reporting of financial transactions and information.

Accountants are responsible for maintaining financial records, preparing financial statements, analysing financial data, and providing financial insights to help businesses make informed decisions.

The focus of accounting is primarily on the accurate and reliable presentation of financial information, compliance with accounting standards, and providing financial information for internal and external stakeholders.

Auditing:

Auditing involves the examination and evaluation of financial records, statements, systems, and processes to ensure accuracy, reliability, and compliance.

Auditors are independent professionals who assess and verify the financial information prepared by accountants. They provide an unbiased opinion on the fairness and transparency of financial statements.

The focus of auditing is to provide assurance to stakeholders, such as investors, lenders, and regulators, regarding the accuracy and reliability of financial information, adherence to accounting principles and standards, and identification of any financial irregularities or fraud.

Working capital refers to the difference between a company’s current assets and its current liabilities. It represents the amount of funds available to a business for its day-to-day operations and is a measure of the company’s short-term liquidity.

Working capital is calculated using the following formula:

Working Capital = Current Assets – Current Liabilities

A compound journal entry is a type of journal entry that involves multiple debits and/or credits. It is used to record complex transactions that affect multiple accounts simultaneously. Compound entries are typically used when a transaction involves multiple aspects or multiple accounts are affected by a single event.

Here’s an example of a compound journal entry:

Let’s say a company purchases office supplies on credit and also pays cash for the remaining amount. The total transaction involves both the accounts payable and cash accounts.

Office Supplies purchased on credit: $500

Cash payment made: $300

To record this transaction, a compound journal entry would be used:

Date: [Date of the transaction]

Accounts Payable $500

Cash $300

Office Supplies $200

Explanation:

The Accounts Payable account is credited for $500 to record the increase in the liability owed to the supplier.

The Cash account is debited for $300 to record the cash payment made.

The Office Supplies account is debited for $200 to reflect the increase in assets.

Accounts receivable represents the money owed to a company by its customers for goods or services sold on credit, while accounts payable represents the money owed by a company to its suppliers or vendors for goods or services purchased on credit.

Double-entry accounting is an accounting method where every financial transaction is recorded with at least two entries, ensuring that debits equal credits. It follows the principle that every debit must have a corresponding credit, providing a balanced and accurate representation of a company’s financial transactions.

An over accrual refers to a situation where an expense or liability is recorded in excess of the actual amount owed or incurred. It occurs when an organization estimates or accrues more than the actual expense or liability that will be recognized. This can result in an overstatement of expenses or liabilities on the financial statements. Over accruals are typically adjusted in subsequent accounting periods to reflect the accurate amount of the expense or liability. Correcting over accruals helps ensure the financial statements provide a true and fair view of the organization’s financial position.

Or

An over accrual occurs when the estimated amount for an accrual journal entry is excessively high. This overestimation can result in the inclusion of inflated expenses or income. As a result, corrective measures are necessary to adjust the accrual to reflect the accurate amount. By rectifying the over accrual, the financial statements can provide a more accurate representation of the organization’s financial position.

Reversing journal entries are entries made at the beginning of an accounting period to reverse the effect of certain adjusting entries made in the previous period. These entries are typically used for accruals or deferrals that were recorded in the prior period but are no longer applicable in the current period. Reversing entries are often used for items such as accruals of expenses or revenues, prepaid expenses, and deferred revenues.

It is easier for someone to perpetrate fraud using a journal entry than with a ledger because journal entries are typically made at the transaction level and may not be subject to the same level of scrutiny as ledger entries. Journal entries can be manipulated or fabricated to misrepresent transactions or hide fraudulent activities. Additionally, journal entries can be made without leaving an audit trail, making it harder to trace and detect fraudulent behaviour. The ledger, on the other hand, consolidates and summarizes the information from journal entries, which undergoes more scrutiny and review, making it harder to manipulate without raising suspicion.

The journal entry for goods given in charity would vary depending on the specific circumstances and accounting policies of the organization. However, here’s a sample journal entry based on the assumption that the goods given in charity are accounted for at their fair market value:

Example:

Date: [Date of the transaction]

Charity Expense $500

Inventory $500

When providing samples free of charge, the journal entry would typically involve recognizing the cost of the samples as an expense.

Depreciation is the systematic allocation of the cost of an asset over its useful life. It represents the decrease in value or usefulness of an asset due to factors such as wear and tear, obsolescence, or passage of time.

There are several types of depreciation methods used to allocate the cost of an asset:

Straight-Line Depreciation

Declining Balance Depreciation

Units of Production Depreciation

Sum-of-Years’-Digits Depreciation

Double Declining Balance Depreciation

MACRS (Modified Accelerated Cost Recovery System

Here’s an example of a depreciation journal entry:

Assume a computer with a cost of Rs. 50,000, a useful life of 5 years, and no residual value. The depreciation method used is the straight-line method.

Date: [Date of the depreciation entry]

Depreciation Expense Rs. 10,000

Accumulated Depreciation Rs. 10,000

Explanation:

• The Depreciation Expense account is debited for the amount of depreciation for the specific period (Rs. 10,000). This expense is recognized on the income statement.
• The Accumulated Depreciation account is credited for the same amount (Rs. 10,000). This account is a contra-asset account and represents the cumulative depreciation recorded on the balance sheet.

By recording this journal entry, the cost of the computer is gradually expensed over its useful life, reflecting the reduction in its value due to wear and tear or obsolescence.

Accruals in accounting refer to the recognition of revenues and expenses in the financial statements before the cash is received or paid. They are used to ensure that financial statements reflect the economic activities and financial position of a company accurately, even if cash transactions have not occurred yet.

There are two types of accruals:

Accrued Revenues: These are revenues earned but not yet received in cash. They represent the amount owed to the company by its customers or clients. Accrued revenues are recorded as assets on the balance sheet and as revenues on the income statement.

Accrued Expenses: These are expenses incurred but not yet paid in cash. They represent the obligations or debts that a company owes to its suppliers, employees, or other parties. Accrued expenses are recorded as liabilities on the balance sheet and as expenses on the income statement.

In journal entries, “drawings” refer to the withdrawal of cash or other assets from a business by the owner for personal use. Drawings are typically made by the owner of a sole proprietorship or partners in a partnership. It represents a reduction in the owner’s equity or the partner’s capital account.

When recording drawings in journal entries, the owner’s withdrawal is typically debited to a Drawings account and credited to the Cash or the relevant asset account being withdrawn.

A cash discount should be recorded in a journal entry as a reduction in the amount of cash paid to a vendor or supplier. It is typically recorded in the accounts payable or purchases section of the general ledger.

A cash discount should be recorded in a journal entry as a reduction in the amount of cash paid to a vendor or supplier. It is typically recorded in the accounts payable or purchases section of the general ledger.

Here’s an example of a journal entry for recording a cash discount:

Date: [Date of the transaction]

Accounts Payable – $1,000

Cash – $980

Discounts – $20

Explanation:

The Accounts Payable account is debited for the original amount owed to the vendor.

The Cash account is credited for the reduced amount actually paid, reflecting the cash discount.

The Discounts account is credited for the value of the cash discount received.

Deferred tax liability is the amount of taxes for which a company has not paid the full amount but is expected to be paid in the future. However, it doesn’t account for a company’s unfulfilled tax obligations but is actually payments that are not due yet. It could signify that an organization/company may pay more tax in the future owing to current transactions.

Contra entries, also known as contra accounts or contra-entries, are journal entries that are made to offset or reduce the balance of another related account. They are used to provide a clear presentation of financial information and to separate specific transactions or adjustments from the main account.

Give an Example of Purchase and Sales Journal Entries with GST?”]

the Goods and Services Tax (GST) is applicable to purchases and sales transactions. Here are examples of journal entries for purchases and sales transactions with GST:

Purchase Journal Entry with GST:

Assume a purchase of goods for Rs. 10,000 with a GST rate of 18%.

Date: [Date of the transaction]

Purchases Rs. 10,000

Input CGST (Current Assets) Rs. 900

Input SGST (Current Assets) Rs. 900

Accounts Payable Rs. 11,800

Explanation:

The Purchases account is debited for the net amount of the purchase (Rs. 10,000).

Input CGST account (Current Assets) is debited for the CGST component (Rs. 900).

Input SGST account (Current Assets) is debited for the SGST component (Rs. 900).

The Accounts Payable account is credited for the total amount including GST (Rs. 11,800).

Sales Journal Entry with GST:

Assume a sale of goods for Rs. 20,000 with a GST rate of 18%.

Date: [Date of the transaction]

Accounts Receivable Rs. 23,600

Output CGST (Current Liability) Rs. 2,100

Output SGST (Current Liability) Rs. 2,100

Sales Rs. 20,000

Explanation:

The Accounts Receivable account is debited for the total amount including GST (Rs. 23,600).

Output CGST account (Current Liability) is credited for the CGST component (Rs. 2,100).

Output SGST account (Current Liability) is credited for the SGST component (Rs. 2,100).

The Sales account is credited for the net amount of the sale (Rs. 20,000).

There are several different types of journal entries in accounting. Here are some common types:

General Journal Entries: These are standard journal entries used to record various business transactions, such as sales, purchases, expenses, and cash receipts.

Adjusting Journal Entries: These entries are made at the end of an accounting period to adjust certain accounts for accruals, deferrals, depreciation, and other adjustments needed to accurately reflect the financial position and results of the business.

Recurring Journal Entries: These entries are recorded on a regular basis for transactions that occur repeatedly, such as monthly rent expenses, depreciation, or interest income.

Reversing Journal Entries: These entries are made at the beginning of an accounting period to reverse the effect of certain adjusting entries made in the previous period.

Closing Journal Entries: These entries are made at the end of an accounting period to transfer the balances of temporary accounts (revenue, expenses, dividends) to the retained earnings account and reset the temporary accounts for the next period.

Compound Journal Entries: These entries involve more than one debit or credit and are used to record complex transactions that affect multiple accounts.

Bad debts journal entries are accounting entries made to record the write-off or provision for bad debts. A bad debt refers to an amount that is unlikely to be collected from a customer or debtor. When a company determines that it is unlikely to receive payment for a specific accounts receivable, it needs to recognize the bad debt expense and adjust its financial records accordingly.

There are two common methods used to account for bad debts: the direct write-off method and the allowance method.

Direct Write-Off Method:

• Under this method, the bad debt expense is recognized at the time when it is deemed uncollectible.
• The journal entry to record a direct write-off is as follows:
• Debit: Bad Debt Expense
• Credit: Accounts Receivable
• This entry reduces the value of the accounts receivable and recognizes the bad debt expense as an expense in the income statement.

Allowance Method:

• The allowance method anticipates that a certain percentage of accounts receivable will not be collected and establishes an allowance for doubtful accounts.
• The journal entry to record the allowance for doubtful accounts is as follows:
• Debit: Bad Debt Expense
• Credit: Allowance for Doubtful Accounts
• This entry recognizes the estimated bad debt expense by increasing the allowance for doubtful accounts. The allowance is a contra-asset account, reducing the value of accounts receivable on the balance sheet.
• When a specific account is deemed uncollectible, the following entry is made:
• Debit: Allowance for Doubtful Accounts
• Credit: Accounts Receivable
• This entry reduces the accounts receivable balance by the specific amount deemed uncollectible, reflecting the write-off of the bad debt.
• If a previously written-off account becomes collectible again, the following entry is made:
• Debit: Accounts Receivable
• Credit: Allowance for Doubtful Accounts
• This entry reinstates the account in the accounts receivable balance and reduces the allowance for doubtful accounts by the same amount.

It’s important to note that the specific journal entries may vary depending on the company’s accounting policies and practices. Consulting the organization’s specific guidelines or working with a qualified accountant is recommended to ensure accurate recording of bad debts.