What could happen if adjusting entries are not made?

Failing to make adjusting entries can lead to financial statements reflecting an inaccurate financial position. Adjusting entries are crucial for ensuring that revenues and expenses are recognized in the period they are incurred, following the accrual basis of accounting. This means that if, for example, an expense incurred during the reporting period is not recorded, it will understate expenses and overstate net income, thereby misrepresenting the company's financial health.

Additionally, if revenue earned but not yet recorded is omitted, it can lead to an inaccurate depiction of total revenue, affecting both the balance sheet and income statement. This can mislead stakeholders, such as investors, creditors, and management, when making decisions based on these financial reports. Overall, adjusting entries are essential for achieving accurate and meaningful financial statements that reflect the true performance and position of a business.