What does "accrual basis" accounting recognize?

Accrual basis accounting recognizes revenues and expenses at the time they are earned or incurred, rather than when cash is exchanged. This means that revenues are recorded when a service is performed or a product is delivered, regardless of when payment is actually received. Similarly, expenses are recognized when they are incurred, even if payment has not yet been made.

This approach provides a more accurate representation of a company's financial position and performance over a given period, as it aligns income and related expenses in the same period. This method is in accordance with generally accepted accounting principles (GAAP) and helps in understanding the economic activities of a business more clearly compared to cash basis accounting, where revenue and expenses are only recognized when cash transactions occur.