Final answer:
Firms make adjusting entries at the end of a period to record related revenues and expenses, ensuring accurate financial reporting. Adjusting entries account for prepaid expenses or accruals that may not be recorded in the normal course of business. Examples include prepaid insurance and wages owed to employees for past work.
Step-by-step explanation:
Firms make adjusting entries at the end of a period to record related revenues and expenses because it helps ensure accurate financial reporting. These adjusting entries are necessary because many operating activities occur over a period of time and may not be recorded as they happen. By making adjusting entries at the end of the period, the company can account for any prepaid expenses or accruals that have not been recorded in the normal course of business.
For example, let's say a company has prepaid insurance for the entire year. If the company were to record the expense as it happens, the entire expense would be recorded in one month instead of being spread out over the year. By making an adjusting entry at the end of each month, the company can record the appropriate amount of insurance expense for that month.
Similarly, if a company owes wages to employees for past work, it would make an adjusting entry at the end of the period to record the expense. This ensures that the company's financial statements reflect the expenses incurred during that period.