Accrual Basis Accounting
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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. 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.