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

Which method records revenues and expenses when they are actually received or paid?

1. Accrual-basis accounting

2. Cash basis accounting

3. Amortization accounting

4. Budget accounting

The correct answer is: Cash basis accounting

The method that records revenues and expenses when they are actually received or paid is known as cash basis accounting. This approach focuses on the actual flow of cash in and out of a business. Under cash basis accounting, transactions are recognized only when cash exchanges hands – that is, when payments are actually received for revenues or when expenses are actually paid. This makes it simpler for small businesses or individuals to track their cash flow, as it provides a clear picture of how much cash is available at any given time. In contrast, accrual-basis accounting records revenues and expenses when they are incurred, regardless of when cash is actually exchanged. This method provides a more accurate picture of a company's financial health over time but can complicate cash flow management. Amortization accounting pertains to allocating the cost of an intangible asset over its useful life, which does not directly relate to the timing of cash transactions. Budget accounting focuses on financial planning and the tracking of income and expenses against a budget, rather than the timing of cash flows. Thus, cash basis accounting is the appropriate method for recognizing revenues and expenses based solely on cash transactions.