What happens to the financial statements when adjusting entries are not made properly?

When adjusting entries are not made properly, the financial statements can mislead users about the company’s performance. Adjusting entries are crucial for ensuring that revenues and expenses are recognized in the period in which they occur, adhering to the accrual basis of accounting. If these entries are inaccurate, it can result in misstated financial results—such as inflated earnings or understated liabilities—which can significantly distort a user's understanding of the company’s financial health.

Misleading financial statements may affect decisions made by investors, creditors, and management, as they rely on accurate reporting to assess performance and make informed choices. Adjustments can include accruals, deferrals, and estimations that directly impact the income statement and balance sheet. Therefore, proper adjustment is vital for maintaining the reliability and transparency of financial reporting.