Final answer:
Accruals and deferrals ensure that financial statements reflect economic events in the correct accounting period, adhering to the accrual accounting method and matching principle. They are essential adjustments in the accounting process for representing a company's true financial position and performance.
Step-by-step explanation:
In financial reporting, accruals and deferrals are not optional; they are a critical part of the adjusting and closing process. The correct answer to the question of whether accruals and deferrals are optional in financial reporting; are used only in tax reporting; ensure that financial statements reflect economic events in the proper period; or violate the matching principle is that they ensure that financial statements reflect economic events in the proper period. Both accruals and deferrals are mechanisms that adhere to the accrual accounting method, which aligns with the matching principle. This principle states that expenses should be recognized in the same period as the revenues they help to generate.
Accruals involve recording expenses and revenues that have been incurred but not yet paid or received, aligning reported financial activity with the time periods in which economic events actually occur. This ensures the revenue recognition and expense matching concepts are followed, which makes financial statements more meaningful for users.
Deferrals, on the other hand, involve revenues that have been received in advance of being earned, or expenses that have been paid in advance of being incurred. Recording these amounts as liabilities or assets first, they are then recognized as revenue or expense when they are actually earned or incurred.
Through this process, the financial statements of a company can accurately represent its financial position and performance over a given accounting period, and therefore, neither violate the matching principle nor are they used exclusively for tax purposes.