Anne Marie, the owner of Anne\'s Beauty Salon, comes to see you again. She tells

Question

Anne Marie, the owner of Anne's Beauty Salon, comes to see you again. She tells you that she just got her year-end set of financial statements from her accountant and is more confused. Here are her questions. 1. I have very little cash and yet he says that I had a good year with $15,000 net income. He said it was because we use accrual accounting (whatever that means). I know I paid 6 month's rent ($1,400 a month) in advance at the end of the year. I also paid my insurance for the next year. Insurance cost $6,000. I have several customers who had a lot of services done on credit and haven't paid yet. I think that totals $11,948 owed to me. Can you explain? 2. was paid $200 in advance for some hair coloring I will do in January. He tells me that's a liability. That doesn't make any sense to me? Please explain. 3. In December I did several hair several haircuts during the last week of the year and sent bills to all the customers? When is that counted? How would you answer these questions?

Explanation / Answer

Accural Means : Recongnize your income when you actual provide the service. in Case you have taken advance but you have to provide service in Next year then it that case it wont include in in current year income and that will be included in income statement next year after providing service( $1400) . Similer $11948 will be included in cuurent year income as you have already provided service even though you have not received amount from cusotmer. same will be shown as debtor in Balance sheet.

Recognize any expenses in which year when other provide actual service to you whether you have paid amount before taking actual service. So Advance Rent and Insurence Cost will not be part of your current income Statement as same is related with next year . Same will be shown in Asset side as advance rent and Prepaid Insurence in balance sheet . Same will be booked as expenses in Income Statement in Next year.

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