Oregon Construction Contractors (CCB) Practice Test

What accounting method allows you to report income when it is received?

1. Accrual method

2. Cash method

3. Modified method

4. Deferred method

The correct answer is: Cash method

The cash method of accounting allows businesses to report income when it is actually received, rather than when it is earned. This means that if a contractor completes a job but does not receive payment until a later date, they would not record that income until the payment is made. This method reflects a more immediate snapshot of cash flow, which is particularly beneficial for small businesses and contractors who need to manage their available cash effectively. This approach can simplify the accounting process since it focuses on the actual flow of cash in and out of the business. In contrast, the accrual method records income when it is earned, irrespective of when the payment is received, which can create a disconnect between reported income and available cash. The modified method combines aspects of both the cash and accrual methods but does not solely pertain to the reporting of income at the time of receipt. The deferred method typically relates to postponing the recognition of income, which also does not fit the criteria for reporting income upon receipt. Thus, the focus on recognizing income based on receipt in the cash method makes it the correct choice in this context.