Final answer:
Adjusting entries are made when the financial statements are prepared, which ensures income and expenses are recorded in the correct accounting period and complies with the revenue recognition and matching principles.
Step-by-step explanation:
Adjusting entries are recorded c) when the financial statements are prepared. These entries are essential in the practice of accrual accounting and are used to adjust income and expense accounts so that they comply with the revenue recognition and matching principles. Adjusting entries ensure that revenue and expenses are recognized in the appropriate accounting period.
For example, consider a company that pays advance rent for the next six months. An adjusting entry would be made each month to recognize one month's worth of rent as an expense in the current period's financial statements, rather than recording the entire amount as an expense when the payment is made.
It is important to note that adjusting entries are made before the preparation of financial statements and after all the transactions for the period have been recorded. They are necessary to make the financial statements a more accurate reflection of the company's financial status and performance during the period.