Utah Contractor Practice Exam

Which of the following best describes cash basis accounting?

1. Revenues are recorded when earned

2. Expenses are recorded when incurred

3. Transactions are recorded only when cash changes hands

4. All transactions are recorded regardless of cash flow

The correct answer is: Transactions are recorded only when cash changes hands

Cash basis accounting is characterized by the practice of recording revenue and expenses only when cash is actually received or paid out. This method focuses on the cash flow of a business and provides a straightforward view of income and expenses. In cash basis accounting, revenues are acknowledged when cash is received from customers, and expenses are recognized only when cash is disbursed for costs incurred. This approach is especially useful for small businesses or individuals who want to maintain a simple accounting method without dealing with accounts receivable or payable. It contrasts with accrual accounting, where revenues and expenses are recorded when they are earned or incurred, regardless of when cash transactions occur. Therefore, cash basis accounting provides a clear alignment between a company's cash flow and its financial statements at any given time.