M-100 The Essentials Of Community Association Management Practice Test

Which basis of accounting recognizes expenses when they are incurred, regardless of whether they have been paid?

Cash basis Accrual basis Modified cash basis None

Correct Answer:

Accrual basis

Explanation:

Accrual accounting records expenses when they are incurred, not when payment is made. This follows the matching principle, which aims to link expenses to the period in which the related goods or services are used or the revenue is earned. For example, if a janitorial service is provided in December but billed and paid in January, accrual accounting records the expense in December, reflecting when the service occurred. In contrast, cash basis would book the expense only when the cash is paid, and a modified cash basis blends elements of both. Using accrual provides a more accurate picture of financial performance for the period and is commonly used for formal financial reporting.

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