Utah Contractor Practice Exam

Under which method is income counted when the sale occurs?

1. Credit method

2. Accrual method

3. Cash method

4. Deferred method

The correct answer is: Accrual method

The accrual method of accounting recognizes income when it is earned, regardless of when the payment is actually received. This means that if a sale occurs, the income from that sale is recorded at the time the sale is made, not when cash is transmitted. This method aligns income recognition with the economic activity of providing goods or services, reflecting a more accurate picture of a company's financial health over time. In contrast, other methods, such as the cash method, wait until payment is received before recognizing income. The credit method typically involves handling income that is recognized but not yet paid, which can create discrepancies in cash flow reporting. The deferred method refers to recognizing income at a later date, once certain conditions are met, such as receiving payments or completing services. By using the accrual method, businesses can provide a clearer view of their performance by matching revenues with the expenses incurred to generate those revenues in the same accounting period. This is particularly important for long-term contracts or businesses that operate on credit.