Administrative Analyst Practice Exam

This question tests accrual accounting: revenue is recognized when earned and expenses are recognized when incurred, regardless of cash flow. Under this approach, you record revenue when the seller has fulfilled the earning process (even if cash isn’t yet received), and you record expenses when the related obligation or consumption occurs (even if cash isn’t yet paid). For example, a sale made on credit is recorded as revenue today because the earnings process is complete, not when the customer pays. A wage expense is recognized when the employees have earned it, even if the payday is later. Depreciation is spread over the asset’s useful life, not tied to when cash changes hands. Cash basis would only record events when cash moves, which can distort timing of income and expenses. Tax basis follows tax rules rather than economic reality. Modified accrual is used in some governmental funds with timing constraints, not the standard full accrual practice. Therefore, the basis described is accrual accounting.