IREM Certified Property Manager (CPM) Practice Test

Accrual accounting is the method that recognizes revenue when it is earned rather than when cash is received. This means that transactions are recorded in the financial statements as soon as they occur, regardless of when payment is actually received. For example, if a tenant signs a lease agreement and agrees to pay rent starting in a future month, the revenue from that rent is recognized at the time the lease is signed, not when the cash is received each month. This approach provides a more accurate picture of financial performance and the economic reality of a property management operation, as it aligns revenue with the period in which it is earned. Using this method also adheres to the matching principle, which states that expenses should be matched to the revenues they help generate in the same time period. This principle is crucial for property managers and investors who need to understand both current cash flow and overall profitability over time. Accrual accounting is standard practice in property management and other industries, aligning with generally accepted accounting principles (GAAP). The other accounting methods, such as cash basis accounting, recognize revenue only when cash is actually received, while modified accrual accounting combines elements of both cash and accrual methods, primarily in governmental accounting contexts. Budget accounting focuses on forecasting and managing expenditures rather