What is meant by the accrual basis of accounting?

The accrual basis of accounting is defined by the recognition of revenues when they are earned and incurred, regardless of when cash transactions occur. This means that income is recorded at the time when a sale is made or a service is performed, not necessarily when the payment is actually received. This approach aligns with the matching principle, which states that expenses should be matched with the revenues they help to generate, providing a clearer picture of a company's financial performance during a specific period.

By recognizing revenues and expenses in the period they are earned or incurred, the accrual basis allows for more accurate financial statements, reflecting the true financial activity and condition of the business. This method is foundational for businesses as it aids stakeholders in understanding the ongoing operations and future profitability.

Other options incorrectly describe cash accounting principles or focus on aspects unrelated to the core definition of accrual accounting. The accrual basis emphasizes timing related to the performance of services or delivery of goods rather than actual cash flows.