Inactive accounts are closed and are not to be used in the future. Dormant accounts are not currently functional but may be used in the future. This is the basic difference you want to highlight in the accounting interview answer.
Use some of these tips for answering this question.
Mention specific criteria or conditions that must be met for an account to be considered inactive or dormant.
Discuss the implications of having inactive and dormant accounts in the financial records.
Sample Answer : “In accounting, inactive and dormant accounts are two distinct terms used to describe the status of certain accounts, and they have specific characteristics that set them apart.
Inactive Accounts :
* An inactive account refers to an account that has had no financial transactions or activities over a specific period. But it still remains open and is not officially closed or classified as dormant.
* Inactivity in such a case may arise due to various reasons. It could be either that accounts opened were for specific projects and have concluded. Or, accounts that were previously active but have not been used for an extended period.
Dormant Accounts :
* A dormant account, on the other hand, is an account that has remained inactive for an extended period and has little to no financial activity.
* The definition of dormancy may vary depending on local regulations, but it is generally characterised by an account not having any transactions for a considerable duration. In some jurisdictions, specific timeframes, such as 12 months or more, might be used to classify an account as dormant.
Differences :
* The key difference between inactive and dormant accounts lies in their level of inactivity and the treatment they receive.
* Inactive accounts have experienced no activity for a certain period but remain open and may be reactivated with a transaction.
* Dormant accounts, on the other hand, are considered more inactive, often for an extended period. They may be subject to specific regulations or procedures set forth by the governing authorities.
Implications
* Having both inactive and dormant accounts in the financial records can impact financial reporting and management decisions.
* Inactive accounts might clutter the chart of accounts. That affects the financial analysis. Companies should regularly review their accounts and consider closing unnecessary inactive accounts to maintain accurate financial records.
* Dormant accounts may require special treatment in accordance with local laws or accounting standards. In some jurisdictions, these accounts might be subject to escheatment, where unclaimed funds are transferred to the state or relevant authority after a certain period of dormancy.
