What is a potential consequence of not making adjusting entries?

Not making adjusting entries can lead to misrepresentation of the company’s financial position. Adjusting entries are essential for ensuring that revenues and expenses are recorded in the correct accounting period, in accordance with the accrual basis of accounting. This foundational principle dictates that financial statements should reflect all earned revenues and incurred expenses for a given period, irrespective of cash transactions.

When adjusting entries are neglected, it can result in financial statements that either overstate or understate income or assets and liabilities. This misrepresentation can mislead stakeholders — including investors, creditors, and management — into thinking that the company's financial health is better or worse than it actually is. Accurate financial reporting is crucial for informed decision-making and for maintaining trust and transparency with stakeholders. Thus, the importance of making these entries cannot be overstated, as they are integral to providing a true picture of the company's performance and position.