What does an adjusting entry typically recognize?

An adjusting entry typically recognizes revenue and expenses that have accrued. This is essential for adhering to the accrual basis of accounting, which dictates that revenue should be recognized when earned and expenses when incurred, regardless of when cash is exchanged. This ensures that the financial statements accurately reflect the company's financial performance during the accounting period.

Adjusting entries are made at the end of an accounting period to account for income and expenses that haven’t yet been recorded in the accounting system, which might involve accrued revenues, such as services rendered but not yet billed, and accrued expenses, such as utilities consumed but not yet paid for. By making these adjustments, companies ensure that their income statements and balance sheets provide a true picture of profit-making and liabilities pertaining to the period.

The other choices do not align with the purpose of adjusting entries. For example, cash transactions are recorded during the regular course of business and do not require adjustments. Future income is not applicable, as adjusting entries deal with already incurred revenues or expenses. Lastly, while liabilities from creditor agreements are important, they are typically recognized at the time of the agreement and do not encompass the broader scope of accrued revenues and expenses that adjusting entries aim to address.