Why are adjusting entries necessary in accounting?

Adjusting entries are essential in accounting primarily to ensure that financial statements accurately reflect the true financial position of a business at the end of an accounting period. This process involves updating account balances that may not have been recorded or recognized during the standard transaction recording process. For instance, revenues earned but not yet received or expenses incurred but not yet paid must be accounted for to comply with the accrual basis of accounting.

By making these entries, a company can align its reported financial results with the actual economic events that have occurred within the period. This accurate representation is crucial for stakeholders, such as investors, creditors, and management, who rely on financial statements to make informed decisions about the entity's performance and financial health.

While aspects such as correcting errors or meeting tax reporting requirements have their place, the primary goal of adjusting entries is to present a faithful view of the company's financial status, thus earning the designation as a key part of the accounting process.