CSLB Contractor's Law & Business Practice Exam

Under the cash accounting system, when should transactions be recorded?

1. Monthly

2. Whenever services are rendered

3. Whenever cash changes hands

4. Only at year-end

The correct answer is: Whenever cash changes hands

In a cash accounting system, transactions are recorded at the time cash changes hands. This means that revenue is recognized when payment is received, and expenses are recorded when they are paid. This method provides a straightforward reflection of cash flow and is particularly beneficial for small businesses or those without complex financial needs. The focus is on actual cash transactions rather than economic events that may affect financial performance but do not involve cash flow at that moment. Other options refer to different accounting principles or practices. Monthly recording does not align with the cash method's focus on cash flow timing. Recording transactions whenever services are rendered implies an accrual system, where revenue may be recognized before cash is received. Lastly, only year-end recording overlooks the continuous nature of business transactions and can lead to significant discrepancies in cash flow management throughout the year. Thus, cash accounting's core principle emphasizes capturing the moment when cash is received or paid out, making the accurate answer the point at which cash changes hands.