What is the purpose of adjusting entries in accounting?

The purpose of adjusting entries in accounting is primarily to align revenues and expenses with the correct accounting period. This alignment is essential for preparing accurate financial statements that reflect a company’s financial position and performance over a specific time frame.

In accrual accounting, revenues must be recognized when earned, regardless of when cash is received, and expenses must be recognized when incurred, regardless of when cash is paid. This matching principle ensures that financial statements accurately represent the company's activities during the reporting period, providing stakeholders with a true picture of the company's operations.

Adjusting entries are crucial at the end of each accounting period to account for transactions that have occurred but have not yet been recorded. This includes items such as accrued expenses, accrued revenues, deferred expenses, and unearned revenues. By making these adjustments, the financial statements will properly reflect all economic events that have taken place during the period, enabling better decision-making by management and providing clearer insights to investors and creditors.