For this discussion, assume the role of a financial manager in a company, and as

Question

For this discussion, assume the role of a financial manager in a company, and assume that you have just hired a new bookkeeper to join your team. You want to assess the new hire's understanding of the accounting processes as a whole, so you decide to ask a series of questions. Select three of the six questions listed below to ask your new bookkeeper, and describe the response you expect to hear:

Book

Libby, R., Libby, P. A., & Short, D. G. (2014). Financial accounting (8th ed.) [Custom text bundle]. New York, NY: McGraw-Hill. ISBN: 9781259329029.

Explanation / Answer

Accounting cycle.

The sequence of six steps in the processing of financial transactions (from the time they occur to their inclusion in financial statements) pertaining to an accounting period. These steps are: (1) analyzing the transactions as they occur, (2) recording them in the journals, (3) posting debits and credits from journal entries to the general ledger, (4) adjusting the assets with a trial balance, (5) preparing financial statements, and (6) closing the temporary accounts called accounting cycle.

2) Revenue principle and its implication on the financial statements.

Realization concept in accounting, also known as revenue recognition principle, refers to the application of accruals concept towards the recognition of revenue (income). Under this principle, revenue is recognized by the seller when it is earned irrespective of whether cash from the transaction has been received or not. This refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation of financial statements.

3) matching principle and why it is critical in the preparation of the accrual-based financial statements

Financial statements are prepared under the Accruals Concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. An exception to this general rule is the cash flow statement whose main purpose is to present the cash flow effects of transaction during an accounting period.

Under Accruals basis of accounting, income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received. Conversely, prepaid income must be not be shown as income in the accounting period in which it is received but instead it must be presented as such in the subsequent accounting periods in which the services or obligations in respect of the prepaid income have been performed.

4) Compare and contrast a prepaid account and a deferred account

deferred charge Cost that is accounted-for in the future (and not in the accounting period in which it is incurred) because of its anticipated future benefit, or to comply with the requirement of matching costs with revenues. Deferred charges include start up costs, financing costs for long-term debt, costs of advertising campaigns, etc., and are carried as a non-current asset on the balance sheet pending amortization. in contrast to prepaid expenses (such as insurance, interest, rent) deferred charges usually extend over a long period (often five years or more) and occur infrequently. Since they have no physical substance (cash realizability) and cannot be used in reducing total liabilities, deferred charges are subtracted from the total assets of the firm when computing financial ratios.

Prepaid account are paid for in advance and recorded as assets before they are used or consumed. Prepaid expenses are shown in the assets section on the balance sheet.Examples of prepaid expenses can be insurance premiums or rent. When a company pays insurance premiums in advance, the insurance coverage relates to a future period. The same is true for rent: when a company pays rent in advance, the rent is related to the occupancy of premises (i.e., building) in the future. Therefore, insurance and rent expenses relate to future periods, and thus, they are called prepaid expenses.

5. Define and differentiate between the purpose of a journal entry, an adjusting entry, and a closing entry

Journal Entry - The entry made in a journal. It will contain the date, the account name and amount to be debited, and the account name and amount to be credited. Each journal entry must have the dollars of debits equal to the dollars of credits.

Adjusting Entry - Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a company's financial statements.

Closing Entry - These journal entries are made after the financial statements have been prepared at the end of the accounting year. Most of the closing entries involve the income statement accounts (revenues, expenses, gains, losses, and summary/clearing accounts) whose balances will be transferred to the owner's capital account or the corporation's retained earnings account. A closing entry also transfers the owner's drawing account (a temporary balance sheet account) balance to the owner's capital account. The closing entries will mean that the temporary accounts (income statement accounts and drawing account) will start the new accounting year with zero balances.

5) Difference between a trial balance and a post-closing trial balance -

The Adjusted Trial Balance is computed after making the Adjusting Entries, in order to ensure that the adjustments have not thrown the books out of balance. Adjustments include amortizing accruals, depreciation, etc. This TB is used to prepare your Income Statement.

The Post-Closing Trial Balance shows all of the accounts remaining after all closing entries have been made. Closing entries include zeroing out the Revenue and Expense accounts, etc. This TB is used to prepare your Balance Sheet.

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