Discussion

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. 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?