Utah General Contractors - Business and Law Practice Exam

Which accounting method records income at the time it is earned?

1. Cash method

2. Accrual method

3. Deferred method

4. Modified cash method

The correct answer is: Accrual method

The accrual method of accounting is designed to record income when it is earned, regardless of when the cash is actually received. This means that under this method, if services are provided or goods are delivered, the income from that transaction is recognized in the accounting period in which the earning activity occurs, not necessarily when the payment is made. This method aligns with the principle of matching revenues with the expenses incurred to generate those revenues, providing a more accurate picture of a company’s financial performance over time. In contrast, the cash method records income only when cash is received, leading to delays in recognizing revenue compared to when the work was performed or the sale occurred. The deferred method involves delaying the recognition of income until specific requirements are met in the future. The modified cash method combines aspects of both cash and accrual accounting but still does not primarily record income at the time it is earned in the way the accrual method does. As a result, the accrual method is the one that accurately reflects income based on when it is actually earned in the business cycle.