Under the modified accrual basis of accounting, expenditures are generally recognized when:

• A. Cash is paid
• B. A new encumbrance is created
• C. An obligation is incurred that will be paid from currently available financial resources
• D. Revenue is recognized

Answer: (C)

Under the modified accrual method used by governmental funds, expenditures are recognized when there is an actual obligation to pay from current resources. This means the government records an expenditure when goods or services are received and a legal liability is incurred that will be paid from resources available in the current period. Cash payments later do not drive the timing, and recording an encumbrance is a separate commitment of resources that does not itself equal an expenditure. Revenue recognition is not about expenditures at all. Therefore, the correct understanding is that an expenditure is recognized when an obligation is incurred that will be paid from currently available financial resources.