What is an adjusting entry in accounting?

An adjusting entry in accounting is defined as a journal entry made at the end of an accounting period to update the balances of accounts to accurately reflect the financial situation of a business. This is essential for adhering to the accrual basis of accounting, which recognizes revenue and expenses when they occur, rather than when cash is exchanged. Adjusting entries are necessary to account for accrued revenues, accrued expenses, deferred revenues, and deferred expenses, ensuring that the financial statements present a true and fair view of the company’s financial position.

This process usually involves adjusting accounts like accrued expenses or prepaid expenses so that they reflect the transactions that occurred during the period accurately. Adjusting entries are crucial for the preparation of financial statements, as they help ensure that all revenues earned and expenses incurred are recognized in the appropriate period.

In contrast, entries made solely for tax purposes, those correcting past mistakes, or entries limited to cash transactions do not encapsulate the full purpose and function of adjusting entries. Adjusting entries are comprehensive tools encompassing various aspects of accounting adjustments to maintain accuracy in financial reporting.