Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

Under which accounting basis are revenues recognized when earned rather than when cash is received?

1. Cash basis

2. Accrual basis

3. Modified cash basis

4. Fund accounting

The correct answer is: Accrual basis

The correct answer is based on the accrual basis of accounting, which recognizes revenues when they are earned, regardless of when cash is actually received. This method aligns with the principle that transactions should be recorded in the period in which they occur, providing a more accurate reflection of an entity’s financial position and performance during a specific timeframe. In contrast, the cash basis only recognizes revenues when cash is received, which can lead to discrepancies in financial reporting if there are delays in cash transactions. The modified cash basis incorporates elements of both cash and accrual accounting but does not consistently recognize revenues when earned across all transactions. Fund accounting is primarily used by non-profit organizations and governmental entities and focuses on tracking the sources and uses of funds rather than the recognition of revenues and expenses in the same way that accrual and cash basis accounting do. Thus, understanding the significance of recognizing revenues when earned rather than upon cash receipt is crucial for accurate financial reporting, and this is precisely what the accrual basis accomplishes.