Final answer:
Under accrual accounting, the entire expected loss of an unprofitable contract is recognized in the current period, adhering to the principle of prudence in financial reporting.
Step-by-step explanation:
When dealing with an unprofitable contract, the accounting standard that requires the entire expected loss to be recognized in the current period is accrual accounting. This approach aligns with the accounting principle of prudence, which mandates that all expected losses should be accounted for as soon as they become apparent, regardless of whether the cash flow has occurred. This ensures that the financial statements provide a realistic and cautious presentation of the company's financial position. Contrastingly, cash accounting and modified accrual accounting do not require recognition of losses until the relevant cash flows actually occur.
The correct answer is 1) Accrual accounting. In accrual accounting, expenses are recognized when they are incurred, regardless of when the payment is made. For an unprofitable contract, the expected loss is considered an expense and is recognized in the current period. This helps provide a more accurate representation of the financial performance of the company.