Utah Contractor Practice Exam

Which accounting method tracks actual engagements at the time cash is received?

1. Accrual basis

2. Cash basis

3. Modified cash basis

4. Expense recognition

The correct answer is: Cash basis

The cash basis accounting method tracks actual engagements precisely when cash is received or paid out. This method is straightforward and commonly used by small businesses and individuals because it provides a clear picture of cash flow. Under cash basis accounting, revenues are recorded when they are actually received, meaning that transactions are recognized only when cash changes hands, not when the service is provided or an invoice is issued. This simplicity can make it easier to manage finances, as it aligns income and expenses directly with cash activity. In contrast, the accrual basis method recognizes revenues and expenses when they are incurred, regardless of when cash is exchanged. Modified cash basis is a combination of both cash and accrual methods, often used by larger businesses that want the simplicity of cash accounting while also reflecting certain accrual transactions. Expense recognition is a principle used under the accrual basis which ensures that expenses are matched to revenues in the period in which they are incurred, further distinguishing it from cash basis accounting where expenses are only tracked when cash is paid out.