Why do accounts need adjusting entries?

Adjusting entries are compulsory at the end of each financial period to align the incomes and expenses. Adjusting entries usually occur before the release of the financial statements.

Adjusting entries are of two types:-

• Accruals: Revenues earned or expenses acquired that have not been earlier recorded
• Deferrals: Receipts of assets or the payments of cash well in advance of revenue or expense recognition