Explain the concept of accrual accounting
Theme: Accounting Role: Accountant Function: Finance
Interview Question for Accountant: See sample answers, motivations & red flags for this common interview question. About Accountant: Manages financial records and ensures compliance with regulations. This role falls within the Finance function of a firm. See other interview questions & further information for this role here
Sample Answer
Example response for question delving into Accounting with the key points that need to be covered in an effective response. Customize this to your own experience with concrete examples and evidence
- Definition of accrual accounting: Accrual accounting is a method of recording financial transactions based on the recognition of revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid
- Accrual basis vs. cash basis accounting: Accrual accounting differs from cash basis accounting, where transactions are recorded only when cash is received or paid
- Recognition of revenues: Under accrual accounting, revenues are recognized when they are earned, meaning when goods or services are delivered to customers, and the amount can be reasonably estimated
- Recognition of expenses: Expenses are recognized in accrual accounting when they are incurred, meaning when goods or services are received, and the amount can be reasonably estimated
- Matching principle: Accrual accounting follows the matching principle, which requires that expenses be matched with the revenues they help generate in the same accounting period
- Accruals & deferrals: Accrual accounting involves the use of accruals and deferrals to ensure that revenues and expenses are properly recognized in the correct accounting period
- Accruals: Accruals are adjustments made to record revenues or expenses that have been earned or incurred but have not yet been recorded
- Deferrals: Deferrals are adjustments made to record revenues or expenses that have been recorded but have not yet been earned or incurred
- Accrual accounting & financial statements: Accrual accounting provides a more accurate representation of a company's financial position and performance by matching revenues and expenses in the appropriate periods, resulting in more reliable financial statements
- Advantages of accrual accounting: Accrual accounting provides a better understanding of a company's profitability, allows for more effective financial analysis and forecasting, and complies with generally accepted accounting principles (GAAP)
- Disadvantages of accrual accounting: Accrual accounting can be more complex and time-consuming than cash basis accounting, and it may require estimation and judgment in determining the timing and amount of revenue and expense recognition
Underlying Motivations
What the Interviewer is trying to find out about you and your experiences through this question
- Knowledge & understanding of accounting principles: Ability to explain the concept of accrual accounting
- Experience with financial reporting: Understanding the importance of accrual accounting in financial statements
- Attention to detail & accuracy: Ability to accurately record and recognize revenue and expenses in the appropriate accounting period
- Analytical skills: Ability to analyze and interpret financial data based on accrual accounting principles
Potential Minefields
How to avoid some common minefields when answering this question in order to not raise any red flags
- Lack of understanding: Not being able to explain the concept clearly or accurately
- Confusion with cash accounting: Mixing up accrual accounting with cash accounting or not differentiating between the two
- Inability to provide examples: Not being able to provide real-life examples or practical applications of accrual accounting
- Limited knowledge of financial statements: Not understanding how accrual accounting affects financial statements such as the balance sheet and income statement
- Failure to mention matching principle: Not highlighting the importance of matching expenses with revenues in accrual accounting