Utah Contractor Practice Exam

Under the cash basis of accounting, when should a contractor enter revenue into their books?

1. When the money is promised

2. When the work is completed

3. When the money is actually paid

4. When the invoice is issued

The correct answer is: When the money is actually paid

Under the cash basis of accounting, a contractor records revenue when cash is actually received. This method focuses on the flow of cash in and out of the business, meaning that revenue cannot be recognized simply because a contract was signed or work was completed; it must be associated with the actual payment being received. When a contractor provides a service or completes a project, the revenue is not recorded until the payment is made. This means that even if an invoice is issued or the work is finished, the revenue does not get booked in the accounting records until the contractor has received the cash from the customer. By adhering to this principle, the contractor ensures that their financial statements accurately reflect their cash position at any given time. This method is often simpler for smaller businesses that might not have extensive financial operations, allowing them to manage their accounting efficiently while tracking actual cash flow.