Why are adjusting entries necessary at period end?

• A. They record cash receipts and payments to the bank.
• B. They close the temporary accounts to retained earnings.
• C. They update accrual accounts for revenues earned and expenses incurred that have not yet been recorded.
• D. They set budgets for the next period.

Answer: (C)

Period-end adjusting entries are made to bring revenues and expenses into the period in which they are actually earned or incurred, under accrual accounting. They update accrual accounts for revenues earned and expenses incurred that have not yet been recorded, so the income statement reflects the period’s activity and the balance sheet shows accurate assets and liabilities. Think of items like revenue earned but not yet billed, or expenses incurred but not yet paid, which require an entry even though cash hasn’t moved. For example, recognizing service revenue that has been performed but not billed, recording depreciation on assets, recognizing wages earned but not yet paid, or adjusting for consumed prepaid expenses. These adjustments support the matching principle by pairing the period’s revenues with the expenses incurred to generate them. The other actions—recording only cash receipts/payments, closing temporary accounts, or setting budgets—do not describe what adjusting entries do.