Final answer:
Accrual accounting is a method of accounting that records transactions when they occur, not when cash is exchanged. It takes into account revenues earned and expenses incurred during a specific period. In this case, the student's net income of $15,000 is calculated based on revenues earned and expenses incurred, even though there may be little cash on hand.
Step-by-step explanation:
Accrual accounting is a method of accounting where transactions are recorded when they occur, not when the money is exchanged. It takes into account both revenues earned and expenses incurred during a specific period, regardless of when the cash is received or paid.
In your case, even though you have little cash on hand, your net income of $15,000 is calculated based on revenues earned and expenses incurred. Let's break it down:
- You paid 6 months' rent in advance at the end of the year, which amounts to 6 x $1,400 = $8,400. This is considered an expense incurred during the year, even though the cash was paid in advance.
- You also paid your insurance for the next year, which is $6,000. Again, this is considered an expense incurred during the current year.
- You have several customers who haven't paid yet, and they owe you $11,948. This is considered revenue earned during the current year, even if you haven't received the cash yet.
So, your net income of $15,000 takes into account these revenues and expenses, in accordance with accrual accounting principles.