Accrual Accounting-Anne’s Beauty Salon

Accrual Accounting-Anne’s Beauty Salon

Through understanding accrual accounting, Anne will understand why the accountant considers the financial period a good year. Under the accrual accounting method, revenues and expenses are recognized in the same period (Piosik, 2021). Anne should understand that the revenue earned and expenses incurred are entered into the business journal regardless of when the money exchange occurs. Notably, this means that the entry is recorded when services are provided rather than when payment is received. The entries for debts and payments are also made, which is why Anne’s $11,948 is an income account to be owned even though the amount of money has not been received. Hence, this method of accounting allows the accountant to record revenue before receiving payment for the services offered and record the expenses as they are incurred. Therefore, the accountant considered current assets, recorded the rent paid in advance, and then prepaid insurance before their due date.

The payment made in advance by a customer of $200 is considered a liability because the hair coloring services have not been offered. In layman’s terms, it is a loan received by the company that will be paid through offering hair coloring services. As previously explained, a liability is what the business owes to external parties. Under the accrued revenue principle, the payments received for which no service or good is offered in return should be considered a liability.

The several haircuts done in the last week of December for which bills were sent to the customer should be recorded for the same week they were made. This is based on the accrued revenue recognition. According to Barragato (2019), it provides that revenues and expenses should be recorded for the period in which they are incurred and not when payments for the same transactions are received.

References

Barragato, C. A. (2019). The impact of accounting regulation on non-profit revenue recognition. Journal of Applied Accounting Research. https://doi.org/10.1108/JAAR-03-2017-0041

Piosik, A. (2021). Revenue recognition in achieving consensus on analysts’ forecasts for revenue, operating income, and net earnings: The role of implementing IFRS 15. Evidence from Poland. Procedia Computer Science, 192, 1560-1572.

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Accrual Accounting-Anne’s Beauty Salon

Anne Marie, the owner of Anne’s Beauty Salon, comes to see you again. She tells you she just got her accountant’s year-end set of financial statements and is more confused. Here are her questions.
I have very little cash, yet he says I had a good year with a $15,000 net income. He said it was because we use accrual accounting (whatever that means). I know I paid six months’ rent ($1,400 a month) in advance at the end of the year. I also spent my insurance for the following year. Insurance cost $6,000. I have several customers who have 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?
I was paid $200 in advance for some hair coloring I will do in January. He tells me that’s a liability. Doesn’t that make any sense to me? Please explain.
In December,r 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?