How do adjusting entries affect the integrity of financial reporting?

Adjusting entries play a crucial role in ensuring the reliability and accuracy of financial statements. They are necessary to align the recorded transactions with the actual financial performance and position of a company, reflecting an accurate picture of its operations. For instance, adjusting entries are made for accrued revenues, accrued expenses, deferred revenues, and deferred expenses to properly match revenues and expenses to the period in which they are incurred, adhering to the matching principle of accounting.

By making these entries, companies can ensure that their financial reports present a true and fair view of their financial health, which is essential for stakeholders such as investors, creditors, and management. Reliable financial statements enhance the decision-making process, allowing users to assess the company's past performance and make informed predictions about future growth and stability.

As a result, adjusting entries are fundamental to maintaining the integrity of financial reporting, making it possible for all users to trust the information disclosed in financial statements.