Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is the definition of accrual-basis accounting?

1. A method that records income and expenses when they are received

2. A method that records all economic activity regardless of cash flow timing

3. A method limited to monthly expense monitoring

4. A method focusing only on cash transactions

The correct answer is: A method that records all economic activity regardless of cash flow timing

Accrual-basis accounting is defined as a method that records all economic activity regardless of cash flow timing. This means that income is recognized when it is earned (regardless of when it is actually received), and expenses are recorded when they are incurred (regardless of when they are paid). This method provides a more accurate representation of a company's financial position and performance because it takes into account all obligations and receivables, giving a fuller picture of its financial health during a given period. In contrast, other methods like cash-basis accounting only recognize transactions when cash changes hands, which could lead to misinterpretations of a company's profitability and financial status over time. This broader scope of economic activity makes accrual accounting a commonly accepted standard for financial reporting in many industries, including real estate management.