How do adjusting entries impact financial statements?

Adjusting entries play a crucial role in ensuring that financial statements accurately reflect a company's financial position and performance for a specific period. They are necessary to account for accrued revenues and expenses, depreciation, and other factors that may not involve cash transactions but still impact the financial statements.

When adjusting entries are made, they typically alter net income, assets, or liabilities on the income statement and the balance sheet. For example, recording accrued expenses can decrease net income while simultaneously increasing liabilities on the balance sheet. Similarly, recognizing unearned revenue adjusts both liabilities on the balance sheet and revenue on the income statement.

This is why the correct answer focuses on the comprehensive impact that adjusting entries have, demonstrating their essential role in financial reporting and ensuring that the financial statements present a true and fair view of the company’s financial activities during the reporting period.