As a financial manager in a company, to better assess the new hire's understanding of the accounting processes as a whole, I’d ask the following three questions: (1) What is your definition of the accounting cycle? (2) Could you compare and contrast a prepaid account and deferred account and provide examples of each and how each affect the financial statements? (3) Could you define the difference between a trial balance and a post-closing trial balance To confidently ensure the new hire has a firm grasp on the accounting processes, I’d expect the following responses: (1) The accounting cycle begins with a transaction of some sort and the transaction is defined by a purchase, a sale or incurred or recurring expenses (The Accounting Cycle, …show more content…
On example of this is the handling of cash. Cash is considered an asset account and if the business receives a cash payment from a customer, the cash account would increase with a debit and to decrease you’d credit this type of account. Conversely, liability accounts, such as salaries payable would carry a credit balance and to increase these accounts, we’d need t o credit and to decrease we’d need to debit the account. The debit and credits for each account are typically recorded as a “T-account” where the left side of the “T” would record the debit amounts and the right side would record the credit amount (The Accounting Cycle, …show more content…
After the four basic financial statements are prepared, this marks the end of the accounting period and all temporary accounts are zeroed out and the net balance is closed to retained earnings (The Accounting Cycle, 2016). (2) There are similarities and differences between a prepaid account and deferred account. Both accounts record the use of goods and services before the cost is expensed, however deferred accounts record the purchase of goods or services that are delayed and will be after a year and the prepaid account records the goods and services the business uses or diminishes within one year of purchase (Averkamp, 2016). Examples of expenses included on a prepaid account are facility rent or insurance premiums (Horton, 2015). Examples of deferred expenses are relocation costs and advertising expenses (Horton, 2015). Accounts are reported on the balance sheet as Assets, however due to the timing in which goods and services are depleted, deferred accounts are reported as a noncurrent asset and the prepaid expenses are reported as a current assets (Averkamp, 2016). Failing to record pre-paid and deferred accounts properly could result in the inaccurate report of assets which would result in under or overstated income in the subsequent financial