Final answer:
Adjusting journal entries like accruals and deferrals are essential before finalizing financial statements. Accruals record revenues earned or expenses incurred not yet cash-transacted, while deferrals deal with payments made or received that relate to future periods.
Step-by-step explanation:
Two types of adjusting journal entries commonly made before preparing financial statements are accruals and deferrals. Accruals involve revenues earned or expenses incurred that have not yet been recorded by the end of the accounting period. For example, if a company earns interest on an investment during a period but will not receive the cash until after the period ends, an accrual entry would be made to recognize the interest revenue earned. On the other hand, deferrals are expenses or revenues that have been recorded but are not yet earned or incurred. A common example of this would be an insurance premium that has been paid in advance; the expense would be deferred by recognizing it gradually over the coverage period.