What is the accounting method called that records revenues when earned and expenses when incurred?

Accrual accounting is the method that recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is actually exchanged. This approach provides a more accurate representation of a company's financial performance during a given period, as it aligns income and expenses with the period in which they occur rather than when cash is received or paid.

This method is particularly beneficial for businesses that extend credit to customers or have long-term contracts, as it allows them to reflect the true economic activity of the business. By recognizing revenues and expenses in the period they are earned or incurred, accrual accounting helps stakeholders gain a clearer understanding of profitability and financial position, which is essential for decision-making processes.

In contrast, cash accounting records transactions only when cash is exchanged, which may not provide a complete picture of the financial status of a business. Deferral accounting, on the other hand, is a concept used within accrual accounting related to postponing the recognition of revenues or expenses until a future date. Hybrid accounting combines elements of both cash and accrual methods, but does not align with the definition provided in the question. Therefore, accrual accounting is the most accurate choice for the accounting method that captures when revenues and expenses are recognized in alignment with their occurrence.