What is accrual accounting?

Accrual accounting is a foundational principle in accounting that states revenues and expenses should be recognized when they are earned or incurred, regardless of when cash is exchanged. This method reflects the true financial position and performance of a business over a specific period, capturing transactions as they happen in real time, which provides a more comprehensive view of a company's financial health.

By recognizing income when it is earned and expenses when they are incurred, rather than when cash is received or paid, accrual accounting aligns with the matching principle. This principle ensures that revenues are matched with the expenses incurred to generate those revenues within the same accounting period. This approach allows for more accurate reporting of financial performance and makes financial statements more informative and meaningful to stakeholders.

In contrast, methods that focus solely on cash transactions or ignore future transactions do not provide a complete picture of financial health, as they may misrepresent the timing and financial outcome of business activities. Therefore, option C accurately describes accrual accounting and its significance in effective financial reporting.