What is an "adjusting journal entry"?

An adjusting journal entry is an essential component of the accounting cycle, particularly during the preparation of financial statements at the end of an accounting period. It is used to update account balances to ensure that they accurately reflect the financial position and performance of the entity in accordance with the accrual basis of accounting. This process is critical because it accounts for income and expenses that have been incurred but not yet recorded in the company's books by the end of the reporting period.

For example, an adjusting entry might be made to recognize accrued expenses (like wages that have been incurred but not yet paid) or unearned revenue (such as payments received in advance for services not yet performed). Making these adjustments ensures that the financial statements present a true and fair view of the company’s financial situation.

The other options do not accurately describe the purpose or function of adjusting journal entries. Removing an asset from the books is a different type of transaction that typically involves disposals, while taxes owed pertain to liabilities rather than the general updating of account balances. Also, entries altering the cash flow statement focus on cash movements rather than adjustments necessary for accurate financial reporting.