Which accounting method matches revenues with the expenses incurred to generate them, typically used in project-based accounting?

The method that matches revenues with the expenses incurred to generate those revenues is known as accrual accounting. This approach recognizes income when it is earned, regardless of when the cash is received, and expenses when they are incurred, regardless of when they are paid. This matching principle is fundamental in providing a more accurate representation of a company’s financial performance over a specific period, particularly in project-based accounting, where the timeline of projects may stretch over months or years.

While cash accounting records income and expenses based solely on cash transactions, it does not adhere to the matching principle, leading to potential misrepresentation of financial health at any given time. The completed-contract method, commonly used in long-term projects, defers all revenue and expense recognition until the contract is complete, which can also lead to skewed financial results if not correlated with the actual expenses incurred during the project’s lifecycle. The cost-plus method typically involves adding a standard profit margin to the total costs incurred, but it doesn't focus on the matching principle of recognizing revenues and expenses simultaneously during the accounting period. Thus, accrual accounting stands out as the best method to achieve this matching principle effectively in project-based accounting.