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. 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?

Answer 1

In this question, you will have to explain what ;

• accrual accounting means and how is it accounted
• what prepaid expenses are and how are they accounted why are they in the asset side of the balance sheet
• what do you mean by debtors (optional) how they affect the balance sheet
• what prepaid income is and why is that a liability  

1. Accrual accounting means the accounting method that records revenues and expenses when they are incurred. The term "accrual" refers to any individual entry recording revenue or expense in the absence of a cash transaction. the transaction is recorded even if there is no cash transaction

2. prepaid expenses are those expenses which are paid in advance i.e, the cost of expense is paid out by the person/company but the return for the cost has not yet been received. For example; we have paid rent in advance for the next month it results in prepaid rent and we can now use the rented area for the next month but shall not give any money next month since we have paid so. it is considered as an asset every prepaid expense is an asset until it is consumed.

3.debtors are the people who have enjoyed our services or have purchased our product and has not paid the money to us that is there are to give us money in the future and hence in the above scenario she gives the information of 11948 being debtors to her so the amount is considered as an asset as they are to pay the amount in the near future

4. prepaid income is an accounting concept that refers to a payment that has been received, but the respective asset/service has not yet been delivered.it is the case of prepaid expense directly reversed the money has been received but we have not completed the service and such service should be completed in the near future and when that is done the amount we will get is zero since they have already paid

In the question, they have said that the accountant says that the profit or the year was 15000 and she has less cash in her hand that is due to the debtors and the prepaid expenses that she has in her accounts