The accrual basis of accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash is exchanged. 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 they occur. For example, if a company provides a service 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).