Joe Krazman is a first-year university student and an excellent tennis player. During the winter semester Joe thought that he could use his tennis ability as a way to make money to pay for his education. He started offering lessons in May and he was successful right from the get-go. During May, he received $3,500 in cash from people who purchased lessons. He’s owed another $400 from a couple of people who took lessons but said they would be able to pay him in June. He also received $500 from a family that wanted to guarantee lessons when school ended at the end of June. To ensure that he had a proper location to give lessons he purchased time at his tennis club. During May, he paid the club $1,000 for court time. At the end of May $350 of the amount hadn’t been spent, but Joe will be able to use it to purchase time in June. In late May, Joe was so busy he asked a friend to help him out with lessons. He paid the friend $250 during the month and owed him $50 at the end of the month for lessons he gave in May. To generate more business in the summer Joe began advertising in his community newspaper. The ads appeared in May but he hasn’t received an invoice yet so they won’t be paid until June. Joe was told the ads would cost $75. Joe also spent $150 on supplies such as tennis balls during May.
Prepare income statements for Joe’s business for May using cash and accrual accounting. Explain why the two methods result in different amounts of income. Do you think Joe’s business is successful? Explain your answer.