Which accounting method reports income when earned and expenses when incurred?

The accrual method reports income when it is earned and expenses when they are incurred, regardless of when cash transactions occur. This accounting approach aligns income recognition with the delivery of goods or services rather than the actual receipt of cash, which is crucial for accurately reflecting a business's financial performance over time.

For instance, under the accrual method, if a company delivers a product in December but does not receive payment until January, the income is recorded in December when the product was delivered, not when the payment is received. Similarly, expenses are recognized when they are billed or incurred, not necessarily when they are paid. This method provides a more comprehensive view of a company's profitability and financial status, making it the preferred choice for most businesses, especially larger ones or those that maintain inventory.

The other accounting methods differ significantly in how they recognize income and expenses. The cash method records income and expenses only when cash is received or paid, which can lead to a misleading picture of financial health, particularly for businesses with significant receivables or payables. The modified cash method combines elements of both cash and accrual methods but still does not fully embrace the timing of the accrual method. The tax accounting method can vary depending on the laws and regulations, but