What are adjusting entries in accounting?

Adjusting entries in accounting are essential for ensuring that a company's financial statements accurately reflect its financial position at the end of a reporting period. These entries are necessary because they allow for the correct allocation of income and expenses according to the accrual accounting principle. This principle states that revenue should be recognized when earned and expenses should be recognized when incurred, regardless of when cash is exchanged.

In practice, adjusting entries often involve accrued revenues, accrued expenses, deferred revenues, and deferred expenses. For example, if services are provided in one accounting period but payment is not received until the next, an adjusting entry ensures that the revenue is recorded in the correct period, thereby giving a true picture of the company's financial performance. These entries thus play a critical role in aligning income and expenses with the period in which they are applicable, leading to more accurate financial reporting.

The other choices do not adequately describe the role of adjusting entries; cash transactions focus primarily on cash movements rather than period allocation, summarizing financial transactions pertains to the closure of accounts rather than period recognition, and statements for external stakeholders are a different aspect of financial reporting altogether.