Utah Contractor Practice Exam

Which accounting method records the actual cost of construction?

1. Real concept of accounting

2. Accrual concept of accounting

3. Actual concept of accounting

4. Cash concept of accounting

The correct answer is: Accrual concept of accounting

The accrual concept of accounting is defined by the principle that revenue and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged. This means that under this method, the actual costs incurred during the construction process, such as labor, materials, and overhead, are recognized in the financial records as they happen. As work progresses, costs are accumulated and reflected accurately in financial statements, providing a clearer picture of the project's financial position. In contrast, the cash concept of accounting only records transactions when cash is actually received or paid. While this method may be simpler, it does not provide a true representation of ongoing projects and can mislead stakeholders regarding financial health, particularly in industries with significant ongoing expenses like construction. The real concept and actual concept of accounting are not widely recognized standards in accounting terminology and do not explicitly address the recognition of construction costs in the same way the accrual method does. Therefore, it is the accrual concept that accurately aligns with the need to keep track of actual costs incurred during construction projects.