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 $2,000 owed to me. Can you explain?
2.    I 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

ans1: salon is having the income of $15000 and also it pays dues in advance and few payments are to be received by the company. it shows how is salon performing and also shows the position of the salon. that salon has suffecient income to payoff its dues and further it has also paid few advances therefore salon is not going to face cash crisis in future.The salon is simply trying to recognize its expenses at the time in which the transaction occurred rather than when payment will be made made.

Ans2Owner is correct although he has paid advance for hair colour but he might have taken advance from his customer as well therefore now it is his liability till he did not colour the hair of his customer.

ans3 Since income is always recognised in the month of bill therefore income shall be recognise in the year in which he made the bill.

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