#19 Treatment of Prepaid Insurance

In accounting, we emphasize on ' Matching Principle': to match the expense incurred with the revenue generated in certain period. The idea behind is: there would be any direct or indirect cost incurred during the process of generating revenue within a specified period. The principle emphasize on matching the time frame of expense against the revenue, and the emphasis is on the recognition timing.

Assuming Company ABC entered a fire insurance contract for its building and stocks for a period of 2 years, starting from 1 Jan 07 ~ 31 Dec 08. Company ABC has paid the entire insurance cost of $200,000 in 1 Jan 07.

Apparently, the insurance cost incurred was expense over 2 years. Hence at the end of 31 Dec 07, we should only recognize $100,000 of insurance cost another $100,000 will be sitting in Prepayment account ( Asset). This is to match the expense incurred in the specified period.

To illustrate:

1) When the Company pay the insurance cost ( 1 Jan 2007):
Dr. Prepayment $200,000
Cr. Cash $200,000

2) At the end of 31 Dec 2007
Dr. Insurance Cost $100,000
Cr. Prepayment $100,000

3) At the end of 31 Dec 2008
Dr. Insurance Cost $100,000
Cr. Prepayment $100,000

Interviewing Tips Continued...Questions to Ask

While were on the topic, I found this article (also on BNet) with a well organized list of questions to help you stage the interview...

The 7 Interview Questions You Must Ask

by Brian Libby

There are no magic bullets when it comes to job interview questions, but the way you structure your queries is important: It's the interviewer's job to create a framework for the discussion and prevent it from running off the rails. Every company's needs are different, but a good basic strategy is to ground the interview in questions about past job performance. Then throw in some situational questions to evaluate practical decision making, and learn a little bit about how the job fits in with a candidate's biography.

Question #1: "How about those Yankees?"

Purpose: Develop the rapport needed to get the interview off the ground.
Every interview should begin with an icebreaker. It helps nervous applicants calm down and builds a sense of trust. If you have a 45-minute interview, you should spend at least the first five minutes trying to connect on a neutral topic. Make the person feel at ease and you'll solicit better information—and much more honest responses.
Alternate Version 1: "Did you go to the industry conference last week?"
Alternate Version 2: "Were you affected by the heat wave/cold snap?"
Alternate Version 3: "Did you have a good holiday?"

Question #2: "Talk about a time when you had to overcome major obstacles."

Purpose: Get a clear picture of the candidate's past performance.
Variations on this question should actually comprise your next several questions. Don't hesitate to guide the candidate through the variety of tasks (both tangible and theoretical) necessary to perform the job, and listen carefully to how he or she has handled such challenges. Pay attention to intangibles: some people are better at performing in interviews than on the job. If your candidate continually plays the role of hero or victim, that's a red flag that you're probably not getting the whole story.
Alternate Version 1: "Tell me about a time when you wrote a report that was well received. Why do you think it was successful?"
Alternate Version 2: "Describe a time when you hired (or fired) the wrong person."
Alternate Version 3: "If you had to do that activity again, how would you do it differently?"

Question #3: "What interests you about this position?"

Purpose: Find out how the candidate feels about the job and the company.
People apply for jobs for plenty reasons besides the obvious ones. Asking a candidate why he or she wants the position gives insight into their motivation. The answer may be personal (such as a narrative about what spurred them to seek a new job), or it may connect the candidate to the company: her experience with the brand, the mission statement, or the organization's role in the community. Any of these answers (or some combination) are acceptable—a personal answer can communicate trust, and a connection to the business indicates loyalty and a sense of ownership.
Alternate Version 1: "Where does this job fit into your career path?"
Alternate Version 2: "If you had to convince a friend or colleague to apply for this job, what might you tell them?"
Alternate Version 3: "What motivated you to apply for this job?"

Question #4: "Is there intelligent life in outer space?"

Purpose: Find out what kind of thinker the candidate is and how he deals with surprises.
This is your curveball, designed to make the candidate ad-lib instead of just reciting well-rehearsed answers. How much will he or she play along? As long as it's not too short or too long, virtually any response is a good one. But pay attention to attitude, the way the candidate approaches the problem, and the ease or difficulty they have in coming up with a response.
Alternate Version 1: "How many phone books are there in New York City?"
Alternate Version 2: "How do they get the cream filling inside a Twinkie?"
Alternate Version 3: "Why do people climb mountains?"

Question #5: "Imagine we've just hired you. What's the most important thing on your to-do list on the first day of work?"

Purpose: Learn about the candidate's judgment and decision-making skills.
This is an example of a situational question, which is like a behavioral question in that it's designed to assess judgment, but it's also like a curveball question because it illuminates the candidate's thought process. You want to see whether he demonstrates the competencies and priorities that are important to the job.
Alternate Version 1: "Say a coworker tells you that he submitted phony expense account receipts. Do you tell your boss?"
Alternate Version 2: "How would you handle an employee whose performance is fine but who you know has the potential to do better?"
Alternate Version 3: "What would you do if you got behind schedule with your part of a project?"

Question #6: "Why did you get into this line of work?"

Purpose: Measure the fit between the candidate's values and the culture of your company.
It risks a long, drawn-out answer, but this type of question will help you select candidates that fit your company's culture. It's not about finding people like you, or people with similar backgrounds that led them to your company, but about getting a sense of their values and motivations. Concepts like values and culture can be subjective and difficult to define, but you should be looking for someone whose work ethic, motivations, and methods match the company's. This isn't a quantitative measurement so much as a qualitative one. Coke and Pepsi may seem the same to people outside the soft-drink industry, but each houses people with different approaches to making cola and running a business.
Alternate Version 1: "What do you like best about your current job?"
Alternate Version 2: "When did you realize this would be your career?"
Alternate Version 3: "What keeps you coming to work besides the paycheck?"

Question #7: "But enough about you. What about us?"

Purpose: Find out if the candidate has done his or her homework.
It's a cliché to end an interview with the standard, 'So, any questions?' But the fact remains that you really do want to let the candidate ask a few things of you. Reversing roles communicates that the company seeks an open a dialogue, and it helps you ascertain just how curious and knowledgeable a candidate is about your company. If he doesn't ask any questions about the job or the business, it's a safe bet his heart isn't in it. Listen for insightful questions that demonstrate a sophisticated understanding of the circumstances of the job, the company, the competitive landscape, or the industry.
Alternate Version 1: "Where do you think the company should be in ten years?"
Alternate Version 2: "What's your opinion of our new product?"
Alternate Version 3: "Have you seen the company's new ad campaign?"

Interviewing Tips (From Managements Side)

I haven't had to do it very often, but I have told people that interviewing someone for a job is almost as nerve racking as being interviewed. This article I came across on BNet has some very useful tips...

10 Mistakes Managers Make During Job Interviews

by BNET Staff

Hiring is one of the hardest parts of managing a team. A lot is riding on the initial meeting, and if you're nervous or ill-prepared—or both—it can make you do strange things. The following mistakes are all too common, but they're easy to avoid with some advance preparation.

1. You Talk Too Much

When giving company background, watch out for the tendency to prattle on about your own job, personal feelings about the company, or life story. At the end of the conversation, you'll be aflutter with self-satisfaction, and you'll see the candidate in a rosy light—but you still won't know anything about her ability to do the job.

2. You Gossip or Swap War Stories

Curb your desire to ask for dirt on the candidate's current employer or trash talk other people in the industry. Not only does it cast a bad light on you and your company, but it's a waste of time.

3. You're Afraid to Ask Tough Questions

Interviews are awkward for everyone, and it's easy to over-empathize with a nervous candidate. It's also common to throw softball questions at someone whom you like or who makes you feel comfortable. You're better off asking everyone the same set of challenging questions—you might be surprised what they reveal. Often a Nervous Nellie will spring to life when given the chance to solve a problem or elaborate on a past success.

4. You Fall Prey to the Halo Effect (or the Horns Effect)

If a candidate arrives dressed to kill, gives a firm handshake, and answers the first question perfectly, you might be tempted to check the imaginary "Hired!" box in your mind. But make sure you pay attention to all his answers, and don't be swayed by a first impression. Ditto for the reverse: the mumbler with the tattoos might have super powers that go undetected at first glance.

5. You Ask Leading Questions

Watch out for questions that telegraph to the applicant the answer you're looking for. You won't get honest responses from questions like, "You are familiar with Excel macros, aren't you?"

6. You Invade Their Privacy

First of all, it's illegal to delve too deeply into personal or lifestyle details. Secondly, it doesn't help you find the best person for the job. Nix all questions about home life ("Do you have children?" "Do you think you'd quit if you got married?"), gender bias or sexual preference ("Do you get along well with other men?"), ethnic background ("That's an unusual name, what nationality are you?"), age ("What year did you graduate from high school?"), and financials ("Do you own your home?")

7. You Stress the Candidate Out

Some interviewers use high-pressure techniques designed to trap or fluster the applicant. While you do want to know how a candidate performs in a pinch, it's almost impossible to recreate the same type of stressors that an employee will encounter in the workplace. Moreover, if you do hire the person, they may not trust you because you launched the relationship on a rocky foundation.

8. You Cut It Short

A series of interviews can eat up your whole day, so it's tempting to keep them brief. But a quick meeting just doesn't give you enough time to gauge a candidate's responses and behavior. Judging candidates is nuanced work, and it relies on tracking lots of subtle inputs. An interview that runs 45 minutes to an hour increases your chances of getting a meaningful sample.

9. You Gravitate Toward the Center

If everyone you talk to feels like a "maybe," that probably means you aren't getting enough useful information—or you're not assessing candidates honestly enough. Most "maybes" are really "no, thank yous." (Face it: He or she didn't knock your socks off.) Likewise, if you think the person might be good for some role at some point in the future, then they're really a "no."

10. You Rate Candidates Against Each Other

A mediocre candidate looks like a superstar when he follows a dud, but that doesn't mean he's the best person for the job. The person who comes in tomorrow may smoke both of them, but you won't be able to tell if you rated Mr. Mediocre too highly in your notes. Evaluate each applicant on your established criteria—don't grade on a curve.

Accounting Basics: Accounting and The Accounting Cycle

What is accounting? My old accounting text book defines it as: "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information." The text distinguishes between accounting and bookkeeping. Whereas bookkeeping involves the mechanical process of recording economic activities, accounting expands on that to include analysis and interpretation of financial information as well as preparing financial statements, conducting audits, designing accounting systems, etc.

Since this is a web based forum, lets look at Wikipedia's definition: the measurement, disclosure or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies. The terms derive from the use of financial accounts. Accounting is the art of measuring, communicating and interpreting financial activity. Accounting is also widely referred to as the "language of business".

Any way you look at it, accounting is a process. It is a process of identifying economic events related to a business activity, recording these events, and subsequently reporting on this business activity with some means of financial representation (financial statements or other reports).

Accounting can be represented as a cycle:

1. Observe events.
2. Identify those events which are economic events.
3. Measure the economic events.
4. Record measurements.
   
5. Classify measurements.
   
6. Summarize measurements.
   
7. Report business activity in financial statements or other reports.
8. Interpret the contents of financial statements and other reports.

What really adds value to an accountants services is the ability to supply items #7 and #8.

#18 Deferred Tax Asset from Unearned Income

A deferred tax asset can arise from differences in recognition of income. In this thread we're talking about the deferred tax asset arise from unearned income.

For instance, a financial company is a lessor and receives advance mortgage payments for a building it leases, the tax and book accounting purposes of the payments may differ. The tax laws, under certain circumstances, require the financial company to take into income the entire amount of the payment, even though the payments include monthly payments for the period occurring after the close of the tax year.

For book purposes, this income is not included into income until the payment is actually "earned," that is to say, as each month passes. This is also a deferred tax asset because the item causes a greater amount of income in the current period for tax purposes than it does for book purposes. Why? Because in subsequent years, the corporation will recognize book income when there is not a corresponding recognition of taxable income. Thus, where income is recognized in the current year for tax purposes and will be recognized in subsequent years for book purposes, a deferred tax asset arises.