What accounting method records revenue when earned and expenses when incurred?

What accounting method records revenue when earned and expenses when incurred? The answer is the accrual basis. It recognizes economic activity when it happens, rather than waiting for money to change hands.

Under accrual accounting, a company records a sale when it delivers goods or services and has earned the revenue, even if the customer pays later. It records an expense when it receives the related benefit or incurs the obligation, even if payment comes later. This produces accounts receivable, accounts payable, accrued expenses, and deferred revenue.

The method is central to financial reporting under U.S. generally accepted accounting principles (GAAP) because it gives investors a fuller picture of a period’s performance. For example, December work paid for in January generally belongs in December’s results.

A common mix-up is cash basis accounting, which records transactions when cash is received or paid. Tax reporting may sometimes use cash or modified methods, but that does not change the definition of the accrual basis.