What is the purpose of adjusting entries?

Adjusting entries are necessary to ensure that financial statements accurately reflect the financial position and performance of a business. Their primary purpose is to update account balances for accrued and deferred items that have not yet been recorded in the accounting system. This process aligns the reported revenues and expenses with the period in which they were earned or incurred according to the accrual basis of accounting.

For example, if a business has received services but has not yet recorded the expense, an adjusting entry would recognize that expense in the correct accounting period. Similarly, if revenue has been earned but not yet billed, an adjusting entry will recognize that revenue in the current period. This process enhances the reliability of financial statements, ensuring that they provide a true and fair view of the company's financial performance.

The other options do not represent the primary purpose of adjusting entries. While closing accounts occurs at the end of the fiscal year, this is a separate process that ensures temporary accounts are reset to zero for the next accounting period. Delaying the recognition of expenses and estimating future revenue are not objectives for adjusting entries, as these adjustments are intended to reflect accurate and timely financial data rather than to manipulate the timing of expense recognition or project future income.