What is the purpose of preparing adjusting entries?

The purpose of preparing adjusting entries is fundamentally tied to ensuring accuracy in financial statements. Adjusting entries are necessary at the end of an accounting period to bring all accounts up to date in accordance with the accrual basis of accounting. This involves recognizing revenues that have been earned but not yet recorded, and matching expenses that have been incurred but not yet recorded.

By making these entries, a company guarantees that its income statement and balance sheet accurately reflect the economic activity during the period. Consequently, this reliability of financial statements is crucial for stakeholders, as it influences decision-making by investors, creditors, and management.

While aspects such as cash flow, tax compliance, and revenue generation might be indirectly related benefits, they are not the primary focus of adjusting entries. Instead, the core objective is to accurately represent the financial position and performance of the company.