If the net income is taken to be $15,000 and payment of rent is $8,400, insurance $6,000 then what is left is $600 which Anne thinks is little cash. Therefore, when credits are properly processed, then the $11,948 would be owed to her. The salon also pays dues made in advance and also notably the company is yet to receive few payments. The case illustrates how the salon is progressing and displays the position the salon is based on its financial statement. The financial statement illustrates that the salon can settle its dues based on its sufficient income. It is indeed true that the company has paid a few advances. The case means that the salon would not face any cash crisis in the near future. The salon is now trying to make expenses' recognition during the transaction time rather than when some of the payments were made.
The payment made of $200 is a liability to the company owner who would have hair coloring done in January. The amount is referred to as the unearned service revenue taken as a liability until the point the customer is attended to. The service of hair coloring was not done to the customer yet they already made the advance payment recorded in the December journal entry as earned revenue for the past year/month. Hence, the receiver of the payment (the salon owner) is at a liability.
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Given that income is recognized during the month when the bill was created, the customers' bills are counted when they were created. One has to consider the accounts receivable where there is pending payment yet the service was offered. The payments are likely to be received in the coming year.
