What are "adjusting entries" in accounting?

Adjusting entries are journal entries made at the end of an accounting period specifically to recognize unrecognized income or expenses that have occurred but have not yet been recorded. This process is essential in adhering to the accrual basis of accounting, which states that expenses should be recognized in the period they are incurred, and revenues should be recognized in the period they are earned, regardless of when cash is actually received or paid.

These entries ensure that the financial statements reflect the true financial position and performance of the company by acknowledging all necessary adjustments before preparing final accounts. For instance, if services have been rendered but not yet billed by the end of the period, revenues need to be recorded through an adjusting entry.

In contrast, the other options do not accurately capture the essence of adjusting entries. Adjusting entries are not simply about correcting prior errors or about cash transactions, nor are they primarily about closing the books, which involves a different process altogether focused on summarizing accounts for the period. The primary role of adjusting entries is to update the financial records to ensure that all relevant income and expenses are accurately represented in the financial statements for the reporting period.