What are adjusting entries primarily used to account for in financial reporting?

Adjusting entries are primarily used to account for accruals and deferrals in financial reporting. This is essential for adhering to the accrual basis of accounting, which recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash transactions occur.

Accruals refer to revenues that have been earned or expenses that have been incurred but have not yet been recorded in the financial statements. For example, if a company provides services in December but does not receive payment until January, it must make an adjusting entry to recognize that revenue in December. On the other hand, deferrals involve cash transactions that have occurred but need to be spread over multiple accounting periods. An example of this would be a company that pays rent in advance for office space; an adjusting entry is required to allocate that payment to the appropriate months in which the space is used.

By making these adjustments, the financial statements reflect a more accurate and complete picture of a company's financial performance and position, thus ensuring compliance with accounting standards and providing relevant information to users of the financial statements.