The accrual basis of accounting is a method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash is actually exchanged. This approach provides a more accurate picture of a company's financial position by matching income with the expenses incurred to generate that income. Under this system, accounts receivable and accounts payable are commonly used to track amounts owed and owed to the business. This allows businesses to recognize their financial activities in the period they occur, leading to better financial reporting and decision-making.