12-7. Please use the following choices to fill in the blanks below: a. modified accrual b. accrual c. cash

1. Under the __________ method of accounting, expenses are recognized when assets are used up, while under the __________ method, expenditures are recognized when the asset is purchased.
2. The local governments water enterprise fund uses the __________ method of accounting because it is run like a business.

_____________________________

Is this the correct answer?

1. Under the cash method of accounting, expenses are recognized when assets are used up, while under the modified accrual method, expenditures are recognized when the asset is purchased.
2. The local governments water enterprise fund uses the accrual method of accounting because it is run like a business.

Reasoning for #1: Cash is considered an asset. Under the cash method of accounting, resources are considered to flow out of the organization and an expense is incurred when cash is paid. The modified accrual method of accounting recognizes resource outflows as expenditures rather than expenses.

Reasoning for #2: Enterprise funds are a type of proprietary fund. Proprietary funds record transactions using the accrual basis of accounting.