Florida General Contractor Practice Exam

What is the term for expenses that are accounted for before cash is paid?

1. Accrued Expenses

2. Deferred Expenses

3. Unearned Income

4. Capital Expenses

The correct answer is: Accrued Expenses

Accrued expenses refer to costs that have been incurred but have not yet been paid in cash or recorded in the financial statements. This concept is foundational in accounting, particularly under the accrual basis of accounting, which recognizes expenses when they are incurred, regardless of when cash is exchanged. For example, if a contractor receives services in December but pays for them in January, the cost of those services would be recorded as an accrued expense in December. This method helps match expenses with the revenues they generate, providing a more accurate financial picture of a company’s performance. In contrast, deferred expenses are payments made in advance for services or goods to be received in the future. Unearned income represents payments received before services are performed or goods are delivered, while capital expenses refer to long-term investments in assets that will provide benefits over several years. Understanding these distinctions is essential for proper financial reporting and management in contracting and other business activities.