Adjusting entries at period end affect which accounts?

• A. Only cash accounts.
• B. Permanent accounts like assets and liabilities only.
• C. Accrual accounts, including accrued revenues and expenses, and deferrals.
• D. Equity accounts only.

Answer: (C)

Adjusting entries at period end are used to bring the financial statements to reflect revenues earned and expenses incurred in the period, regardless of when cash moves. They focus on accrual accounts—recognizing accrued revenues and accrued expenses—and on deferrals, such as prepaid expenses and unearned revenues being adjusted to their proper balances. Because of this, adjusting entries touch both income statement accounts (revenues and expenses) and related balance sheet accounts (assets and liabilities tied to deferrals). They typically don’t change cash in the period of adjustment, since cash flows usually occurred earlier or will occur later. This is why describing adjusting entries as affecting accrual accounts, including accrued revenues and expenses, and deferrals, best captures what is adjusted at period end.