Which method recognizes expenses when they are incurred rather than when payment is made?

Accrual accounting is the method that recognizes expenses when they are incurred, rather than when payment is made. This approach aligns with the matching principle, which stipulates that expenses should be matched with the revenues they help to generate, regardless of when cash transactions occur. For instance, if a company receives a bill for services rendered in March but pays it in April, the expense is recorded in March in accrual accounting. This method provides a more accurate reflection of a company's financial position and performance over a specific period, as it accounts for all financial transactions as they occur, enhancing the reliability of financial statements.

In contrast, cash accounting only records revenues and expenses when cash is exchanged, which can lead to a distorted view of a company's financial health during periods where there may be significant receivables or payables. Deferred accounting typically involves the recognition of expenses and revenues at a later date based upon certain conditions being met, while modified cash basis accounting combines elements of both cash and accrual accounting but does not fully embrace the recognition of expenses when incurred. Thus, the characteristics of accrual accounting make it the most accurate method for reflecting financial activity in real-time.