What is typically included in an adjusting entry?

Adjusting entries are a crucial part of the accounting process, primarily used to ensure that revenues and expenses are recognized in the proper accounting period, following the accrual basis of accounting. The correct response emphasizes the inclusion of earned revenue or incurred expenses in an adjusting entry, which addresses two main goals: matching principle and accurate financial reporting.

When recognizing earned revenue, even if cash has not yet been received, the revenue must be recognized in the financial statements for the period in which it was earned. Similarly, incurred expenses need to be recorded, even if they have not yet been paid, to appropriately reflect the costs associated with that period. This ensures that both the income statement and the balance sheet present an accurate and fair view of the company’s financial position.

Adjusting entries often relate to items such as accrued revenues, accrued expenses, deferred revenues, and deferred expenses, ensuring that expenses incurred and revenues earned are reported in the same period. This adherence to proper accounting principles supports transparent and reliable financial reporting, which is essential for stakeholders relying on accurate financial information.