Which accounting method reports expenses when incurred rather than when paid?

The accrual basis accounting method records expenses when they are incurred, regardless of when the cash is actually paid out. This approach adheres to the matching principle, which ensures that expenses are matched with the revenues they help to generate within the same accounting period. This provides a more accurate picture of an organization's financial health and performance by reflecting all obligations and rights at a given time.

In contrast, cash basis accounting only recognizes revenues and expenses when cash is received or paid, which can lead to a skewed view of financial statements, especially in a business with significant credit transactions. Modified accrual accounting, often used in governmental accounting, recognizes revenues when they are measurable and available but generally uses cash basis for expenses. Budgetary accounting is primarily focused on the planning and controlling of financial resources rather than the timing of revenue and expense recognition.