Final answer:
Adjusting entries are categorized as accruals and deferrals, where accruals account for earned but unrecorded revenues and incurred but unrecorded expenses, while deferrals account for received but unearned revenues and paid but unincurred expenses.
Step-by-step explanation:
Adjusting entries are often categorized into two groups: accruals and deferrals.
Accruals
Accruals are adjustments for revenues that have been earned but not yet recorded in the accounts, and for expenses that have been incurred but not yet recorded. An example of an accrual would be recognizing interest revenue that has been earned throughout the period but the cash won't be received until the following period.
Deferrals
Deferrals, on the other hand, are adjustments for revenues that have been received in cash and recorded as liabilities before they are earned, and for expenses that have been paid in cash and recorded as assets before they are incurred. A common example of a deferral is prepaid rent, where the rent is paid in advance and recorded as an asset until the period it pertains to occurs, at which point it is then expensed.