In accounting terms, what does "accrual basis" mean?

Accrual basis in accounting refers to the principle that revenue and expenses are recognized when they are earned or incurred, rather than when cash is exchanged. This means that a company records revenue at the point it has fulfilled its obligation to provide goods or services, regardless of whether payment has been received. Similarly, expenses are recognized when the company has consumed resources or services, not necessarily when payment is made. This approach provides a more accurate representation of a company's financial performance and position during a specific time period, aligning revenues with the expenses incurred to generate them.

The other choices reflect cash basis accounting, where transactions are only recorded when cash is exchanged, which does not provide a complete view of financial activity and can lead to misleading financial statements. This contrasts with the accrual basis, which ensures that all economic events are accounted for in the period they pertain to, enhancing the reliability of financial reports.