Final answer:
Adjusting entries are made to record income and expenses in the period they occur, following the accrual basis of accounting. They involve recognizing transactions that have not been recorded by the end of the accounting period, such as accruals, deferrals, and depreciation.
Step-by-step explanation:
The main purpose of adjusting entries is to b) Recognize transactions and events that are not yet recorded. Adjusting entries are made in the accounting records at the end of an accounting period to allocate income and expenses to the period in which they actually occurred. The principle behind this is the accrual basis of accounting, which means that income and expenses are recognized in the period they occur rather than when cash is exchanged.
Common examples of adjusting entries include recording depreciation expense on fixed assets, adjusting for prepaid expenses that have been used up during the period, accruing for expenses like salaries or utilities that have been incurred but not yet paid, and recognizing revenue that has been earned but not yet billed. These adjustments ensure that the financial statements reflect a company’s actual financial position and performance for the period.
Adjusting entries do not include external transactions, purchasing assets, or paying debts directly. They also are not typically used for correcting errors in the accounting records; errors are corrected by other means.