Question

Which of the following statements regarding adjusting entries is correct?

1) Adjusting entries are made at the beginning of the accounting period to ready the books for the year's activity.
2) Adjusting entries will affect two permanent accounts or two temporary accounts, but not one permanent and one temporary account.
3) Adjusting entries are necessary because not all accounts are up to date at the end of the accounting period.
4) All of the choices are correct regarding adjusting entries.

Answer 1

Statement 3 is correct as adjusting entries are made at the end of the accounting period to update the accounts; the other statements are incorrect because they misrepresent when and how adjusting entries affect accounts.

Step-by-step explanation:

Among the given options, statement 3 is correct: Adjusting entries are necessary because not all accounts are up to date at the end of the accounting period. Adjusting entries ensure that the revenue recognition and matching principles are followed. They are recorded at the end of an accounting period to align the income and expenses to the period in which they actually occurred.

Statement 1 is incorrect because adjusting entries are made at the end of the accounting period to reflect the transactions that occurred during that period. Statement 2 is incorrect because adjusting entries typically affect one permanent account (also known as real accounts, like assets or liabilities) and one temporary account (also known as nominal accounts, like revenue, expenses, or dividends).