What is the meaning of the term "accrual basis accounting"?

The term "accrual basis accounting" refers to the accounting method where transactions are recorded at the time they occur, rather than when cash changes hands. This means that revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of whether cash has been received or paid. This approach provides a more accurate picture of a company's financial position and performance during a specific period, as it matches income with the expenses incurred to generate that income.

Using this basis of accounting, businesses can provide stakeholders with a clearer view of their operations since it reflects all obligations and claims on resources, forming a more comprehensive financial statement. This is in contrast to cash basis accounting, where transactions are recorded only when cash exchanges occur, which can misrepresent a company's true financial health, especially in cases of credit sales or outstanding expenses.

The other options do not accurately describe accrual accounting. Revenue recognition based on cash receipt or expense recognition upon payment does not capture the full economic activity of a business, and limiting financial statement preparation to an annual basis does not relate to the accrual concept itself. Thus, the choice that defines accrual basis accounting correctly is the one that emphasizes the timing of transactions based on their occurrence rather than cash flows.