Accrual accounting, a fundamental principle in financial reporting, meticulously records revenues and expenses at the time they are earned or incurred, rather than when cash transactions occur. This method ensures that financial statements present a more precise and comprehensive picture of a company's financial position, performance, and operational activities. By recognizing revenue when it is earned, regardless of when payment is received, accrual accounting captures the true economic value generated by the business during a specific period. For instance, if a company sells goods or provides services to a customer in December, under accrual accounting, the revenue from that transaction is recorded in December, even if the payment is received in January of the following year. This practice aligns with the revenue recognition principle, which emphasizes the importance of matching revenues with the corresponding expenses incurred to generate those revenues. Similarly, expenses are recorded when they are incurred, regardless of when they are paid. This means that costs associated with producing goods or services, such as raw materials, labor, and overhead expenses, are recognized in the period in which they are utilized, rather than when payment is made. By accurately reflecting expenses in the same period as the related revenues, accrual accounting adheres to the matching principle, which enhances the reliability and relevance of financial statements.