What are ‘adjusting entries’ in accounting?

Adjusting entries are essential components of the accounting cycle that ensure the financial statements reflect the true financial position and performance of a company. These entries are made at the end of an accounting period to properly allocate income and expenses. They address discrepancies that arise because certain transactions may span more than one accounting period, or because revenues and expenses need to be matched to the accounting period in which they are incurred.

For example, an adjusting entry might be necessary to recognize accrued revenues that have been earned but not yet recorded in the accounts, or to account for expenses that have been incurred but have not yet been processed. This ensures that the financial statements present an accurate view of the company's financial activities for that period, in compliance with the matching principle of accounting.

The other options do not accurately define adjusting entries. Entries made at the start of an accounting period relate more to the opening balances rather than adjustments. Entries made during the financial year to reflect changes in equity may pertain to transactions such as issuing new stock or paying dividends but do not encompass the broader purpose of adjusting entries. Lastly, while removing obsolete inventory is an important action, it does not capture the fundamental purpose of adjusting entries, which is to align revenues and expenses accurately within the accounting period.