Under the modified accrual basis, which statement best describes when expenditures are recognized?

• A. An obligation is incurred that will be paid from currently available financial resources
• B. Cash is disbursed
• C. Revenue is earned
• D. A purchase order is issued

Answer: (D)

Under the modified accrual basis used for governmental funds, expenditures are recognized when there is a measurable obligation to pay from current (available) financial resources. In practice, this means that when a binding obligation is created (such as an encumbrance from a purchase order) and the resources to cover it are available, the government records the expenditure. An encumbrance itself is a commitment and not an actual expenditure, serving budgetary control by reserving appropriations. Expenditures are not recognized merely because cash is disbursed, and they are not tied to revenue timing. A purchase order by itself creates an encumbrance, not an expenditure, which is why recognition happens only when the liability becomes due and payable from current resources.