Which accounting method recognizes revenue when it is earned and expenses when they are incurred?

The accounting method that recognizes revenue when it is earned and expenses when they are incurred is known as accrual basis accounting. This method aligns the recognition of income and expenses with the underlying economic events that affect the entity, regardless of when cash transactions occur. Under accrual accounting, revenue is recorded when the product or service has been delivered and the earnings process is considered complete, while expenses are recognized when they are incurred, not necessarily when cash is paid.

This approach provides a more accurate picture of a company's financial performance and position during a given accounting period, as it matches revenues with the expenses incurred to generate those revenues, allowing for better analysis and understanding of financial health and profitability.

Cash basis accounting, on the other hand, recognizes revenue and expenses only when cash is received or paid, which does not reflect the timing of economic events. Modified cash basis accounting combines elements of both cash and accrual methods but does not fully apply accrual principles. Tax basis accounting focuses on revenue and expenses according to tax regulations, which might not align with generally accepted accounting principles (GAAP) for financial reporting purposes. Thus, accrual basis accounting is the distinct method that provides a comprehensive view of a company's financial activities.