Final answer:
The asset-liability approach in accounting recognizes revenue when performance obligations are met, reflecting the economic substance of transactions. Revenue is recognized when it's probable that economic benefits will flow to the company and can be measured reliably, providing a truer match of revenues with expenses.
Step-by-step explanation:
The asset-liability approach is a method in accounting where revenue is recognized based on the matching of revenues with the expenses incurred to generate those revenues, reflecting the economic substance of transactions rather than just their legal form. Under this approach, revenue is recognized when the underlying performance obligations are satisfied, as opposed to when cash is received or when orders are placed. This means that when a company delivers a good or provides a service, associated revenue is recognized at that point if it is probable that the economic benefits will flow to the company and the revenue can be measured reliably.
For example, imagine a business that sells furniture. Under the asset-liability approach, when the furniture is delivered to the customer, the business would recognize the revenue even if the payment will be received at a later date. This method allows for a better matching of revenue with the expenses incurred to produce the revenue, as called for in accruing the costs of those goods. A balance sheet, which lists assets and liabilities, provides a snapshot of a company's financial health at a point in time, and under the asset-liability approach, helps to reflect the true earnings and value generation of the company.