What characterizes accrual basis accounting?

Accrual basis accounting is characterized by recording revenues and expenses when they are earned or incurred, regardless of when cash is actually exchanged. This method provides a more accurate financial picture of a company's performance and position, as it reflects economic events as they happen. For example, revenue is recognized when a service is provided or goods are sold, even if the payment is received later. Similarly, expenses are recorded when they are incurred, not necessarily when they are paid. This approach aligns with the matching principle of accounting, which aims to match revenues earned with the expenses incurred in generating those revenues within the same accounting period.

In contrast, approaches that focus on cash transactions or record items only at the time of cash exchange do not capture economic events as accurately, which can lead to a misleading representation of a company's financial health and operational results.