Under GAAP, which approach is used for recognizing revenue and expenses?

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Revenue and expense recognition under GAAP follows the accrual basis. This means revenue is recognized when it is earned—when goods are delivered or services are performed and collection is reasonably assured—rather than when cash is received. Expenses are recognized when they are incurred—matched to the revenues they help generate and in the period they relate to—regardless of when cash payments occur. This approach reflects the actual economic activity of the period and is guided by the revenue recognition and matching principles. Cash-basis reporting would record items only when cash changes hands, which GAAP does not generally use for external financial statements. Tax basis applies to tax reporting, not GAAP, and net present value analysis is a valuation method, not a rule for when to recognize revenue or expenses.