Final answer:
The described method of recording revenues when earned and expenses when incurred, regardless of cash transactions, is the accrual basis of accounting. This approach is different from the cash basis of accounting and provides a more complete picture of a company’s financial health by accounting for all expenses, both explicit and implicit.
Step-by-step explanation:
If a business records revenues when earned, regardless of whether cash has been received, and records expenses when they are incurred, the accounting system being described is known as the accrual basis of accounting. This method is in accordance with generally accepted accounting principles (GAAP) and provides a more accurate picture of a company's financial position by recognizing economic events regardless of when cash transactions occur.
Under the accrual basis, revenue is recognized when it is earned and expenses are recognized when they are incurred, which may not necessarily be when the cash is received or paid out. This contrasts with the cash basis of accounting, where revenues and expenses are recorded only when cash is exchanged.
The information provided about accounting profit and economic profit helps to further distinguish between these concepts. Accounting profit is calculated based on cash transactions and explicit costs, while economic profit considers both explicit and implicit costs, giving a broader perspective of a company's profitability. Taxes are based on accounting profit, but the true measure of economic success depends on economic profit as it includes all costs associated with running the business.