Florida General Contractor Practice Exam

The accrual system of bookkeeping accounts for which of the following?

1. Only cash transactions

2. Revenue and expenses when they are incurred

3. Financial information at the end of the year only

4. Only sales and not expenses

The correct answer is: Revenue and expenses when they are incurred

The accrual system of bookkeeping recognizes revenue and expenses when they are incurred, regardless of when cash payment is made or received. This means that income is recorded when goods or services have been delivered, and expenses are recorded when obligations are incurred, which provides a more accurate representation of a company's financial position and performance during a specific period. By aligning income with the expenses incurred to generate that income, this method helps in making informed decisions based on the actual economic activity rather than just the flow of cash. In contrast to the other options, which limit the scope of accounting practices or focus only on certain transactions or timeframes, the accrual method provides a comprehensive view of an organization’s financial activities throughout the entire accounting period.