What are 'adjusting entries'?

Adjusting entries are specific journal entries made at the end of an accounting period to update the balances of accounts before financial statements are prepared. This process ensures that all revenues earned and expenses incurred are accurately reflected in the financial statements, aligning with the accrual basis of accounting. This is vital because it allows for the recognition of economic events regardless of when cash transactions occur, ensuring that the financial statements provide a true and fair view of the company's financial position.

For example, adjusting entries might include accruals for unpaid wages or revenues that have been earned but not yet billed. By doing this at the end of the period, the business adheres to the matching principle, which states that expenses should be matched with the revenues they help generate within the same period. Thus, option B correctly defines the role of adjusting entries in the accounting process, highlighting their importance in achieving accurate financial reporting.