Accrual basis accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when the actual cash payment occurs. It is the standard for SaaS and subscription businesses and required for compliance with ASC 606 and IFRS 15.

Example: A company signs a 12-month contract in January and receives full payment upfront. Under accrual accounting, it recognizes 1/12 of the revenue each month rather than all at once.