Final answer:
Adjusting entries are necessary to align revenues and expenses with the period in which they occur, in adherence to the accrual basis of accounting and the matching principle. They are crucial for accurately reporting a company’s financial position and performance on financial statements.
Step-by-step explanation:
Adjusting entries are recorded at the end of the accounting period to ensure that revenues and expenses are recognized in the period in which they occur. These entries are a key component of the accrual basis of accounting, which aligns with the matching principle, ensuring that revenues and expenses are matched in the same period.
By making adjustments, accountants update the general ledger accounts for events that have occurred but are not yet recorded under the periodic accounting system. These entries can involve prepayments, accruals, depreciation, and adjustments for revenues earned or expenses incurred that have not yet been recorded.
For example, if a company pays for insurance coverage for the next year, an adjusting entry will allocate the cost of the insurance over the coverage period. Adjusting entries are necessary for accurately reporting a company's financial position and performance in its financial statements, including the balance sheet, income statement, and statement of cash flows.