Final answer:
Adjusting entries are made in accounting to allocate revenues and expenses accurately to the accounting periods in which they are earned or incurred, ensuring compliance with the accrual basis of accounting.
Step-by-step explanation:
The main purpose of adjusting entries in accounting is Option 2: To allocate revenues and expenses to the appropriate accounting period. Adjusting entries are necessary to apply the accrual basis of accounting, which requires that revenues and expenses be recorded in the period they are earned or incurred, regardless of when the cash transactions occur.
Adjusting entries ensures that income statement accounts reflect the revenues earned and expenses incurred during an accounting period. For example, if a company received advance payment for services that will be provided over the next year, adjusting entries would be made at the end of each accounting period to recognize the portion of the service that has been performed, thus matching revenues with the period in which they are earned.
Similarly, if an expense is incurred but not yet paid, such as utilities or rent, an adjusting entry ensures that the expense is recognized in the period when it was incurred, rather than when payment is made. This is essential for preparing accurate financial statements that reflect the true financial position of the company at the end of an accounting period.