How can the accrual basis of accounting affect net income?

The accrual basis of accounting significantly affects net income by providing a more accurate representation of a company's financial performance over a specific period. Under this method, revenues are recognized when they are earned, regardless of when cash is received, and expenses are recognized when they are incurred, regardless of when cash is paid.

This approach ensures that the financial statements reflect the economic activities of a business during the accounting period. For instance, if a company provides services in December but receives payment in January, under the accrual basis, the revenue would be recognized in December, thereby appropriately matching it with the expenses incurred in the same period. This matching principle is fundamental to the accrual basis of accounting and enhances the reliability of financial reporting, leading to a clearer view of profitability and net income for stakeholders.

This contrasts with other accounting methods, such as cash basis, which might show a distorted view of net income due to the timing of cash flows. By adhering to accrual accounting, businesses can provide more relevant information that allows for better decision-making and analysis of trends over time.