Utah Contractor Practice Exam

What accounting method is more commonly used in small businesses?

1. Credit method

2. Accrual method

3. Cash method

4. Hybrid method

The correct answer is: Cash method

The cash method of accounting is commonly used in small businesses because it is straightforward and aligns closely with the day-to-day operations of many small firms. This method recognizes revenue and expenses when they are actually received or paid, rather than when they are incurred. This simplicity makes it easier for small business owners to track their cash flow, manage their finances, and ensure they have enough liquidity to cover current expenses. Small businesses often have simpler financial structures and may not deal with complex transactions that require the more detailed accrual method. The accrual method, while providing a more accurate picture of a company's financial position by accounting for receivables and payables, demands more record-keeping and can be more challenging for small business owners without an accounting background. The hybrid method combines aspects of both cash and accrual methods, but it is less common among small businesses due to its complexity. The credit method is not a recognized accounting method and doesn't apply in this context. Hence, the cash method is favored for its simplicity and practical application in managing small business finances.