Florida Building Contractor Business/Finance Practice Exam

When under the accrual basis of accounting, when are expenses reported?

1. When paid

2. When incurred

3. When matches revenue or is used up

4. At the end of the fiscal year

The correct answer is: When matches revenue or is used up

Under the accrual basis of accounting, expenses are reported when they match the related revenues they help generate or when they are incurred and used in the period. This principle ensures that financial statements reflect all relevant expenses in the same accounting period as the revenues they are associated with, providing a more accurate picture of a company's financial performance. This matching of revenues and expenses allows for a clearer understanding of profitability, as it aligns the costs incurred to earn revenue with the income earned during that period. By recognizing expenses when they are utilized rather than when they are paid, businesses can better track their financial position and make informed operational and financial decisions. In contrast, the other options do not align with the accrual accounting principles. Recognizing expenses only when paid does not reflect the actual economic activity of the business in the reporting period. Similarly, recognizing expenses solely at the end of the fiscal year ignores the ongoing nature of revenue generation and expense incurrence throughout the accounting period. Thus, understanding this timing is crucial for accurate financial reporting.