Florida Building Contractor Business/Finance Practice Exam

Under which accounting method are expenses recorded when they are incurred and matched with revenue?

1. Cash basis accounting

2. Modified cash basis accounting

3. Accrual basis accounting

4. Tax basis accounting

The correct answer is: Accrual basis accounting

Accrual basis accounting is a fundamental accounting method where expenses are recognized and recorded when they are incurred, rather than when they are paid. This approach aligns expenses with the revenues they generate in the same accounting period, offering a more accurate depiction of a company’s financial position. By pairing expenses with the related revenue, accrual accounting provides insight into how much it costs to earn that revenue, allowing businesses to better analyze their profitability and financial health over time. This method is essential for businesses seeking to present a complete and consistent financial picture, particularly those operating under Generally Accepted Accounting Principles (GAAP). The other accounting methods primarily focus on when cash transactions occur, rather than when expenses or revenues are actually generated or incurred, which is why they do not fit the definition provided in the question.