Oregon Construction Contractors (CCB) Practice Test

When does income recognition occur under the accrual method?

1. When services are completed

2. When cash is collected

3. When expenses are paid

4. When contracts are signed

The correct answer is: When services are completed

Income recognition under the accrual method occurs when services are completed because this accounting method focuses on recognizing income when it is earned, not necessarily when cash is received. In the accrual basis of accounting, revenue is recognized at the point when the performance obligation is satisfied, meaning the work has been completed, and the service has been provided to the customer. This approach aligns with the principles of matching revenues with the expenses incurred to generate those revenues, providing a more accurate financial picture of a company's performance during a specific period. In contrast, recognizing income upon the collection of cash or the signing of contracts does not adhere to the principles of accrual accounting, as these events do not necessarily reflect the completion of services rendered. Similarly, recognizing income when expenses are paid also does not align with the accrual method, as expense recognition is tied to the expenses incurred within the same period that revenues are earned.