The accrual basis of accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash is actually received or paid. This method provides a more accurate picture of a company's financial position by matching income with the expenses incurred to generate that income. Under the accrual basis, transactions are recorded in the accounting period in which they occur. For example, if a company provides services in December but receives payment in January, the revenue is recorded in December. This approach is commonly used by businesses and is a key principle in Generally Accepted Accounting Principles (GAAP).