DECA+ Business Management and Administration Practice Exam

What characterizes the accrual accounting method?

1. Expenses are recorded only when paid

2. Income is recorded based on cash transactions

3. Transactions are journalized when they occur, regardless of cash flow

4. Only significant transactions are recorded

The correct answer is: Transactions are journalized when they occur, regardless of cash flow

The accrual accounting method is characterized by the practice of recording transactions when they occur, regardless of when cash is exchanged. This means that revenues are recognized when earned and expenses are recognized when incurred as part of the related activities, not necessarily when the cash is received or paid. For example, if a service is provided in December but payment is not received until January, the revenue is still recognized in December under the accrual method. This approach provides a more accurate picture of a company's financial position, as it aligns revenues and expenses in the period in which they occur, thus offering better insight into profitability and financial performance over time. In contrast, other methods like cash accounting only record transactions when cash changes hands, leading to reports that may not reflect the actual economic activities of the business. Additionally, simply recording only significant transactions fails to provide a comprehensive view of all transactions affecting the financial statements, which is contrary to the inclusion principles of accrual accounting.