What are adjusting entries and why are they necessary at period end?

• A. To finalize the cash balance
• B. To correct clerical errors
• C. To bring accounts to the proper accrual basis amounts for revenues and expenses
• D. To close temporary accounts

Answer: (C)

Adjusting entries are made at period end to align the accounting records with the accrual basis, recognizing revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid. This ensures the income statement reflects the period’s actual performance and the balance sheet shows accurate asset and liability balances. They fix timing differences such as revenues earned but not yet billed, or expenses incurred but not yet paid, and they handle deferrals (cash received or paid in advance) and the allocation of costs for long-term assets through depreciation. They also incorporate estimates like bad debt allowances. Adjusting entries occur before closing entries to ensure the numbers used for closing reflect the true period activity. They are not about finalizing cash balances, correcting clerical errors, or performing the closing itself.