I develop an econometric strategy that allows identification of accounting quality. The strategy relies on a new way of characterizing the dynamics of accounting accruals. The characterization is intuitive and does not hinge on strong assumptions about the earnings and accrual processes, or about managerial preferences. The identifying assumptions derive from two accounting properties, namely, that both earnings and cash flows reflect the same underlying performance and that accruals and accounting errors must reverse over time. My approach discriminates between the accounting error and the part of accruals that captures the underlying economic performance. The proposed framework also offers a new way of testing for the presence of earnings management. Implementation issues and empirical evidence are discussed in a companion paper (Nikolaev 2014).