Federal Nursing Home Administrator Practice Exam

In cash accounting, when are expenses recorded?

1. When the event causing the expense occurs

2. When cash is paid out

3. At the end of the accounting year

4. When the company receives an invoice

The correct answer is: When cash is paid out

In cash accounting, expenses are recorded when cash is paid out. This means that the recognition of an expense occurs only at the point when the actual cash transaction takes place, not when the obligation arises or when an invoice is received. This method focuses on the real-time cash flow of the business, providing a straightforward approach to tracking income and expenses. By recording expenses at the time of cash payment, this method can simplify financial statements and give a clear view of the cash available at any given moment. It contrasts with accrual accounting, where expenses are recognized when incurred, regardless of when the cash is exchanged. For example, if a nursing home purchases supplies but does not pay for them until the following month, the expense will only be recorded in the accounting records when the cash is paid, not when the supplies are received or the invoice is issued. This creates a direct alignment with cash movements, making it essential for businesses that primarily deal with cash transactions.