When should adjusting entries be recorded in relation to financial statements?

Adjusting entries are essential to ensure that the financial statements accurately reflect the financial position and performance of a business for a specific accounting period. Recording these entries before preparing the financial statements allows for the recognition of all revenues that have been earned and expenses that have been incurred but not yet recorded in the accounting books.

This timing is critical because financial statements must present a true and fair view of the company's financial situation based on the accrual basis of accounting. Under this basis, revenues are recorded when earned, and expenses are recognized when incurred, regardless of when cash transactions occur. Adjusting entries facilitate this matching principle.

If adjusting entries were to be recorded after the financial statements are prepared, the statements would not reflect all relevant transactions, leading to inaccuracies and potentially misleading information for users of those statements. Moreover, recording them at any time during the accounting period would disrupt the systematic approach of closing the books at period end, making it harder to ensure that the records align correctly at the time financial statements are produced.

Thus, recording adjusting entries before preparing financial statements is fundamental to accurate reporting and is a cornerstone of good accounting practices.