Florida General Contractor Practice Exam

Which type of accounting method records revenues and expenses when they are incurred, regardless of when cash is exchanged?

1. Cash Basis

2. Accrual Basis

3. Modified Cash Basis

4. Hybrid Accounting

The correct answer is: Accrual Basis

The accrual basis of accounting is recognized for recording revenues and expenses when they are incurred, regardless of when cash transactions occur. This method aligns income and expenses with the period in which they are earned or incurred, which provides a more accurate representation of an entity's financial performance and position. By utilizing the accrual basis, businesses can better match revenues to the expenses incurred in generating those revenues during the same accounting period. This practice allows stakeholders to assess the company’s financial health without being misled by timing differences created by cash transactions. In contrast, the cash basis method records transactions when cash changes hands, which can lead to a distortion of financial performance over time, particularly for businesses that have significant credit transactions. The modified cash basis and hybrid accounting can mix elements of both cash and accrual methods, but they do not consistently allocate revenues and expenses as the accrual basis does. Thus, the accrual basis is the most appropriate answer for this question.