Accounting Fundamentals Certification (AFC) Practice Test 2025 – The Comprehensive All-in-One Guide to Exam Success!

Accrual basis accounting is the term that describes the recording of transactions when they occur, regardless of when cash is exchanged. In this method, revenues are recognized when they are earned and expenses are recognized when they are incurred, not necessarily when cash is received or paid. This approach provides a more accurate picture of a company's financial position and performance because it matches income and expenses to the period they relate to rather than the period when cash changes hands.

In contrast, cash basis accounting records revenues and expenses only when cash is actually exchanged. This means that transactions may not be reflected in the financial statements until money changes hands, which can provide a misleading view of financial health in terms of receivables and payables.

Deferred accounting is typically associated with the timing of recognizing revenues or expenses that have been postponed. While deferred transactions may relate to cash flow timing, accrual accounting is more comprehensive in capturing the economic activities of a business.

Thus, accrual basis accounting is the correct answer as it encompasses the recording of transactions that impact financial statements before cash movements occur.