Accounting for IB Interviews: Everything You Need to Know

Accounting is the most commonly tested technical topic in investment banking interviews. It's the foundation everything else builds on – you can't understand valuation, M&A, or LBOs without solid accounting knowledge. This guide covers what you need to know, with a focus on the concepts that actually get asked.

Accrual vs Cash Accounting

This is the most fundamental accounting concept and interviewers test it because it underpins everything:

Cash accounting: Records transactions when cash changes hands. Simple but misleading – a company could deliver products in December but not receive payment until February. Under cash accounting, December looks unprofitable and February looks great, which doesn't reflect reality.

Accrual accounting: Records revenue when it's earned (goods delivered / services performed) and expenses when they're incurred, regardless of when cash moves. This gives a more accurate picture of a company's financial performance in any given period.

Almost all companies use accrual accounting. The Cash Flow Statement exists to reconcile the difference – it shows you what actually happened with cash.

Revenue Recognition

Under IFRS 15 and ASC 606, revenue is recognised when a company satisfies a performance obligation – when the goods or services are delivered to the customer, not when the contract is signed or cash is received.

This creates timing differences. If a software company sells a 12-month subscription for £1,200 upfront, it recognises £100 of revenue per month (as the service is delivered), not £1,200 when the cash arrives.

Deferred Revenue and Accrued Revenue

Deferred Revenue (Unearned Revenue): Cash received before the service is delivered. It's a liability on the Balance Sheet because the company 'owes' the service. As the service is delivered, it gets recognised as revenue. The subscription example above creates £1,200 of deferred revenue on Day 1.

Accrued Revenue: Revenue earned but not yet billed or collected. It's an asset on the Balance Sheet (similar to accounts receivable). Once billed and paid, it moves to cash.

Goodwill

Goodwill is the premium paid in an acquisition above the fair value of the target's identifiable net assets. If you buy a company for £500m and its net assets are worth £350m at fair value, Goodwill is £150m.

Goodwill represents intangible value – brand, customer relationships, employee talent, synergies – that can't be separately identified on the balance sheet.

Impairment (Not Amortisation)

Under IFRS and US GAAP, goodwill is not amortised. Instead, it's tested annually for impairment. If the value of the acquired business has declined, goodwill is written down. This is a non-cash charge on the Income Statement that reduces Net Income but doesn't affect cash flow (added back on the CFS).

Deferred Tax Assets and Liabilities

These arise when the tax treatment of an item differs from the accounting treatment:

Deferred Tax Liability (DTL): Tax owed in the future. Created when a company pays less tax now than its accounting suggests. Most common example: accelerated depreciation for tax purposes. The company claims more depreciation upfront for tax, reducing taxable income today, but will pay more tax later.

Deferred Tax Asset (DTA): Tax benefit to be realised in the future. Created when a company pays more tax now than its accounting suggests, or when it has net operating losses (NOLs) that can offset future taxable income.

The key for interviews: DTAs and DTLs are timing differences, not permanent ones. The total tax paid over time is the same – it's the timing of when it's recognised that differs.

Key Adjustments Analysts Make

Stock-Based Compensation (SBC)

SBC is a non-cash expense on the Income Statement. It reduces Net Income but doesn't cost cash. However, it does dilute shareholders. Analysts debate whether to add it back for valuation – some do (because it's non-cash), some don't (because dilution is a real economic cost). Know both sides.

Operating Leases (Pre-IFRS 16)

Before IFRS 16, operating leases were off-balance sheet. Analysts would capitalise them (add lease liability to debt) to make companies comparable regardless of whether they owned or leased assets.

Restructuring Charges

One-time costs that distort ongoing profitability. Analysts typically normalise EBITDA by adding back non-recurring restructuring charges.

Pension Adjustments

For companies with large pension obligations, analysts may add unfunded pension liabilities to debt when calculating Enterprise Value.

Common Interview Questions

Q: What's the difference between capitalising and expensing?

A: Capitalising puts the cost on the Balance Sheet as an asset (depreciated over time). Expensing puts it directly on the Income Statement, reducing profit immediately. CapEx is capitalised; operating expenses are expensed.

Q: How do you record an acquisition?

A: Assets and liabilities of the target are adjusted to fair value. The difference between the purchase price and the fair value of net assets is recorded as Goodwill. The target's old equity is eliminated.

Q: What happens when you write down inventory?

A: COGS increases on the IS (reducing Gross Profit and Net Income). On the BS, Inventory (asset) decreases. On the CFS, the write-down is added back as a non-cash charge. Cash is unaffected.