Federal Nursing Home Administrator Practice Exam

Which accounting practice records expenses when they are incurred?

1. Cash accounting

2. Modified accrual accounting

3. Accrual accounting

4. Simple accounting

The correct answer is: Accrual accounting

Accrual accounting is the accounting practice that records expenses when they are incurred, regardless of when cash is actually exchanged. This method aligns with the matching principle, which states that expenses should be matched with the revenues they help to generate within the same accounting period. By recording expenses at the time they are incurred, businesses can provide a more accurate picture of their financial status, as it reflects all liabilities that have been incurred during that period, not just those for which cash has been paid. In contrast, cash accounting only records transactions when cash is received or paid out, which can lead to discrepancies in financial reports, especially in scenarios involving credit transactions. Modified accrual accounting is often used in governmental accounting; it records revenues when they are available and measurable and expenses when they are incurred, but it still differs from pure accrual accounting in some aspects. Simple accounting typically refers to basic financial record-keeping methods that may not adhere to any specific accounting standards, which may not provide a comprehensive view of financial obligations.