Why are adjusting entries important in accounting?

Adjusting entries are an essential part of the accounting process because they ensure that income and expenses are recorded in the period in which they occur, following the accrual basis of accounting. This method acknowledges revenues when they are earned and expenses when they are incurred, regardless of when cash is exchanged. By making these adjustments, businesses can accurately reflect their financial position and performance for a given period, which is crucial for stakeholders who rely on financial statements for decision-making.

The relevance of adjusting entries comes into play as it helps in aligning income statement and balance sheet accounts suitably, representing a true picture of the financial operations of the business within the appropriate accounting period.