Which accounting method records income when earned and expenses when incurred?

The accrual basis of accounting appropriately records income when it is earned and expenses when they are incurred, regardless of when cash transactions occur. This method provides a more accurate and comprehensive view of a company’s financial position by recognizing economic events when they happen, not necessarily when cash is exchanged.

For instance, under the accrual method, revenue is recognized when a service is delivered or a product is sold, leading to immediate recognition of income, which can show the company's performance more accurately during a specific accounting period. Similarly, expenses are recorded when they are incurred, allowing for the matching of revenues and related expenses within the same period. This matching principle enhances the ability to analyze profitability and financial results effectively.

In contrast, the cash basis method only records transactions when cash is actually exchanged, which can lead to significant disparities between actual financial performance and the cash flow statement for businesses with credit sales or deferred payments. Other methods like the deferred basis do not exist as formal accounting methods, and a hybrid basis combines aspects of both cash and accrual methods but doesn’t strictly adhere to recognizing income and expenses as outlined in the question.