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 hairs 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?