What accounting method records income when the service occurs and expense when they are incurred?

The accrual method of accounting is utilized when income is recorded at the time the service is performed, and expenses are recorded when they are incurred, regardless of when cash transactions occur. This method emphasizes recognizing the economic events that impact a business's financial position, providing a more accurate reflection of its financial status and performance over time.

By recording income and expenses in the period they happen, the accrual method aligns revenues with related expenses, allowing for a clearer understanding of profitability during a given period. This is essential for businesses, as it helps in making informed decisions based on the actual activities and obligations of the company, rather than just cash flows.

In contrast, other accounting methods such as the cash method only recognize transactions when cash changes hands, which could misrepresent the financial health of the business, especially in cases where services have been provided or obligations incurred but no cash has been received or paid at that moment. Thus, the accrual method is pivotal for businesses that extend credit or engage in longer-term projects, ensuring a consistent financial reporting structure aligned with economic activity.