Which accounting methodology records revenues and costs when they occur?

Accrual accounting is the methodology that records revenues and costs when they actually occur, regardless of when cash transactions happen. This approach aligns with the matching principle, which states that expenses should be recognized in the same period as the revenues they help to generate. For example, if a service is provided in one month but payment is received in the next month, the revenue and associated expense would still be recorded in the month the service was provided. This gives a more accurate representation of a company's financial position and performance over time.

This methodology is essential for businesses that operate on credit, as it allows them to reflect their economic activities more accurately. It can provide better insights into financial health and is often required by Generally Accepted Accounting Principles (GAAP) for larger entities.

Notably, other accounting methods like cash accounting record revenues and expenses solely based on cash transactions, ignoring the timing of when services are rendered or liabilities are incurred. Mixed accounting combines elements of both methods, while deferred accounting specifically relates to recognizing revenues and expenses that are postponed.