What is the purpose of adjusting entries?

The purpose of adjusting entries is to ensure that revenues and expenses are recognized in the correct accounting period, adhering to the accrual basis of accounting. This principle requires that income and expenses be recorded when they are earned or incurred, rather than when cash is exchanged. Adjusting entries are typically made at the end of an accounting period to reflect transactions that have occurred but have not yet been recorded in the accounting system, such as accrued expenses, deferred revenues, and accrued revenues.

By making these adjustments, financial statements present a more accurate picture of a company's financial position and performance for that period, allowing stakeholders to make informed decisions based on reliable information. This practice is integral to producing accurate income statements and balance sheets that truly reflect the company’s economic activities during the reporting period.