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Accounting in Anne’s Beauty Salon Using Accrual Basis The net income of a business may be confusing to calculate since it incorporates the expenses that have been paid for but not consumed and the revenues that are yet to be received. Therefore, unlike the net cash flow whereby only the cash at the disposal is revealed, some cash that is owed to the company but not received and the cash that the company owes is reflected in the net income. More so, the prepaid expenses are considered the assets in the net income since they have not been used (Siciliano, 2015). The financial statements of Anne's beauty shop reveal more net income than the cash Anne has due to the use of the accrual basis of accounting. Precisely, when the accrual basis of accounting is used in the computation of the net income, expenses and revenues are recognized in the financial periods they relate to (Siciliano, 2015). In other words, the calculation of the net income considers the prepaid expenses and the revenues that the business is expecting to receive for that financial period.
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Anne's beauty salon paid $8,400 rent for six months and $6,000 insurance for the following year, totaling $14,400. These are used in the computation of the net income as the assets since they are prepaid expenses. The business also has revenues to be received for the services done worth $11,948; which are also treated in the computation of the net income even before they are received. The $200 received by the business as an advance is a liability since it is a payment received in advance. The amount shall cease to be a liability when the services are rendered to the customer. It is worth noting that with the use of the accrual basis of accounting, revenues are recognized when earned even if they have not actually been received (Siciliano, 2015). Therefore, the haircut payment would be recognized in the same month (December) even if the bills would be paid later.
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References Siciliano, G. (2015). Finance for nonfinancial managers. (2nd. Ed.). New York: McGraw-Hill Education.