What are adjusting entries primarily used for in the accounting cycle?

Adjusting entries are primarily utilized to ensure that income and expenses are allocated to the correct accounting period. This practice is essential for adhering to the accrual accounting principle, which dictates that transactions should be recognized when they occur, regardless of when cash changes hands. By making these entries, businesses can accurately reflect their financial position and performance in their financial statements for a given period.

For instance, if an expense was incurred in December but not paid until January, an adjusting entry would be made at the end of December to recognize that expense in the financial statements for the year ending December. This allows stakeholders to see the true economic activity of the business within the specified timeframe.

Additionally, adjusting entries help to match revenues earned during a specific period with the expenses incurred to generate those revenues, facilitating a more accurate depiction of net income. This alignment is crucial for users of financial statements, such as investors and creditors, who rely on these records to make informed decisions.

While recording depreciation of assets is a specific type of adjusting entry that falls under this category, it is just one aspect of adjustment. Setting budgets for future periods, on the other hand, pertains to planning rather than the recognition of current transactions, and reporting cash flows relates to tracking the movement of cash rather