What is the method of accounting for transactions called?

The correct answer is the modified accrual basis, which is specifically used in governmental accounting. This method combines elements of both accrual and cash basis accounting. Under the modified accrual basis, revenues are recognized when they are both measurable and available to finance expenditures, while expenditures are generally recognized when the related fund liability is incurred.

This method is tailored for governmental entities where resources are often limited, and the focus is on the use of available financial resources. It provides a more accurate picture of the financial condition of a municipality since it takes into account both the timing of revenue recognition and the obligation to pay expenses.

In contrast, the accrual basis records revenues when they are earned and expenses when they are incurred, regardless of when cash is actually received or paid. The cash basis only records transactions when cash changes hands, which may not provide a complete view of a municipality's financial position. Fund accounting, while a concept applicable in the context of governmental financial management, does not specifically define the method of accounting for transactions. Instead, it relates to how resources are categorized and monitored in various funds. Each of these methods serves different needs depending on the organizational structure and reporting requirements of the municipality.