Utah Contractor Practice Exam

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Which accounting basis aligns with recognizing revenue when earned?

Cash basis
Accrual basis
Hybrid basis
Deferred revenue basis

The correct answer is: Accrual basis

The accrual basis of accounting aligns with recognizing revenue when earned. Under this method, revenue is recorded at the point when goods or services have been delivered or performed, regardless of when the cash is actually received. This allows for a more accurate representation of a company's financial position, as it captures all earned income within the relevant accounting period. The cash basis, in contrast, recognizes revenue only when cash is actually received. This can lead to discrepancies in financial reporting, particularly for businesses that may provide services or deliver goods without immediate payment. The hybrid basis combines elements of both cash and accrual, which does not fully align with the principle of recognizing revenue when earned. Deferred revenue, on the other hand, refers to money received before services are delivered, and it is not a basis for recognizing revenue in general.