Oregon Construction Contractors (CCB) Practice Test

Which accounting method offers more flexibility in recognizing expenses?

1. Accrual method

2. Cash method

3. Hybrid method

4. Deferred method

The correct answer is: Accrual method

The accrual method of accounting is designed to recognize expenses when they are incurred, regardless of when the payment is actually made. This method allows businesses to match revenue with the expenses incurred to generate that revenue, providing a more accurate financial picture over time. One of the key advantages of the accrual method is its flexibility in recognizing expenses that may span multiple accounting periods. Businesses can record expenses that relate to specific revenues even if the cash has not yet changed hands. This makes it easier to align costs with the revenues they help to generate, which can be particularly useful for companies with complex transactions or those that provide services over a longer period. In contrast, the cash method records expenses only when cash is actually paid out, which might lead to a skewed view of financial health at any given time, particularly for businesses that deal with a lot of receivables or have significant outlays in one period that pertain to future revenue. The hybrid method incorporates aspects of both cash and accrual methods, but does not provide the same level of comprehensive representation as the pure accrual method. The deferred method focuses specifically on postponing the recognition of income or expenses to a future date, which also does not offer the same flexibility in expense recognition as the accr