Final answer:
The accrual basis method of accounting records revenue when it is earned and expense when it is incurred, offering a more accurate financial representation than the cash basis method. It is the required method for public companies under GAAP.
Step-by-step explanation:
According to the accrual basis method of accounting, revenues are recognized when they are earned and payment is reasonably assured.
For example, if a company completes a service for a customer in December but does not receive payment until January, under the accrual basis, the revenue would be recognized in December when the service was provided.
The cash basis of accounting, on the other hand, recognizes revenue only when payment is received. This method is simpler but may not accurately reflect a company's financial performance.
The accrual basis of accounting is a method where revenue and expenses are recorded in the financial statements when they are earned or incurred, regardless of when the cash is actually received or paid. This approach contrasts with the cash basis of accounting, where revenues and expenses are recorded only when cash is received or paid.
The accrual method provides a more accurate picture of a company's financial health because it includes all the resources that have been earned and all obligations that have been incurred. For example, if a service is provided in December but payment is not received until January, accrual basis accounting would still recognize the revenue in December. This method is required by Generally Accepted Accounting Principles (GAAP) for public companies.