What does accrual accounting recognize?

Accrual accounting recognizes revenues and expenses when they are incurred, irrespective of whether cash has been exchanged. This method aligns with the matching principle, which dictates that expenses should be matched with the revenues they help generate within the same accounting period. This perspective provides a more accurate representation of a company's financial position and performance, as it reflects the economic activity of the business rather than just the cash flow.

For instance, if a company provides services to a customer in December but receives payment in January, under accrual accounting, the revenue is recorded in December when the services were rendered. Similarly, expenses are recognized in the period in which they contribute to generating revenues, even if payment is made in a subsequent period. This comprehensive approach allows stakeholders to assess the true financial health of a business, as it accounts for all obligations and entitlements, not just cash transactions.