What is the purpose of an adjusting entry in accounting?

The purpose of an adjusting entry in accounting is to update account balances before preparing financial statements. Adjusting entries are necessary to ensure that the financial statements reflect the accurate financial position of a business at the end of an accounting period. These entries are made to adjust the revenues and expenses that have been earned or incurred but not yet recorded in the accounting system.

Typically, adjusting entries are made for accrued revenues, accrued expenses, deferred revenues, and deferred expenses. They ensure that the accounting records adhere to the matching principle, where revenues and expenses are recognized in the period they occur, regardless of when cash transactions happen. This process is crucial for producing accurate and reliable financial statements that provide insight into the company's performance and financial health.