CSLB Law & Business ExamBusiness FinancesMedium
A contractor uses the accrual method of accounting. In March, the contractor completes a job and sends an invoice for $15,000, but the customer does not pay until April. Under the accrual method, when should the $15,000 be recorded as revenue?
- AWhen the contractor's tax return is filed
- BIn April, when cash was received
- CIn March, when the job was completed and invoiced
- DSplit evenly between March and April
Show answer & explanationAnswer & explanation
Correct answer: C. In March, when the job was completed and invoiced
Under the accrual method, revenue is recognized when it is earned (job completed, invoice issued), not when cash actually changes hands. This differs from the cash method, which would record the revenue in April.
Why the other options are wrong
- A. Revenue recognition timing is independent of tax filing dates.
- B. This describes the cash method, not accrual.
- D. Splitting revenue is not a recognized accounting practice for this scenario.
Accrual Accounting
An accounting method that records revenue when it is earned and expenses when they are incurred, regardless of when cash is exchanged.
- Contrasts with cash-basis accounting
- Revenue recorded at time of invoicing/completion
- Gives a more accurate picture of financial performance over time
Memory trick: Accrual = Earned, not Received.