Oregon Construction Contractors (CCB) Practice Test

Which accounting method recognizes money in the year it is actually received or paid?

1. Accrual Method

2. In the Cash Method

3. Percentage of Completion

4. Job Order Costing

The correct answer is: In the Cash Method

The Cash Method is an accounting system that recognizes revenue and expenses only when cash has been exchanged. This means that income is recorded when it is actually received, not when the services are performed or goods provided, and expenses are recorded when they are actually paid, rather than when the obligation to pay is incurred. This method is particularly straightforward and is commonly used by small businesses and sole proprietors because it closely aligns with cash flow, making it easier to manage finances. Understanding the significance of the Cash Method is crucial in the construction industry, where cash flow can be a critical component of business operations. This method helps contractors monitor their liquidity, allowing them to make better financial decisions based on the actual cash available for use. It contrasts with other accounting methods like the Accrual Method, which records revenue and expenses when they are earned or incurred, regardless of when cash is exchanged.