Which accounting method requires recognizing income and expenses when they are incurred, regardless of cash flow?

The correct answer is accrual accounting, as this method is based on the principle that income and expenses should be recognized in the period they are incurred, not necessarily when cash is exchanged. This allows businesses to match income earned with the expenses incurred to generate that income, providing a more accurate picture of financial performance during a specific period.

In contrast, cash accounting records income and expenses only when cash changes hands. This method may provide a clearer view of cash flow but can distort the actual financial performance and position of a business over time.

Deferral accounting refers to postponing the recognition of income or expenses to a future date, which aligns with accrual accounting concepts. It is not a standalone method but rather a part of how accrual accounting manages timing differences.

Financial accounting encompasses a broader set of practices, including both accrual and cash accounting, and focuses on the reporting of a company's financial information to external users. Therefore, it does not specifically define the method of recognizing income and expenses based on when they are incurred.

Accrual accounting is essential for providing an accurate financial overview, which is beneficial for business decision-making and compliance with accounting standards.