Anne Marie, the owner of Anneâ€™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 monthâ€™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 havenâ€™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 thatâ€™s a liability. That doesnâ€™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?
P.S. Please answer these questions as if you are a student learning out of an accounting 101 textbook. Thanks