1. Theoretical Foundation
 . The accrual basis of accounting dictates that revenues and expenses must be recognized in the accounting period to which they relate , regardless of when cash is exchanged. This aligns with the Matching Principle, which requires expenses incurred to generate revenue to be recognized in the same period as that revenue.
2. The Need for Period-End Adjustments
At the end of a financial period, cash payments or receipts rarely align perfectly with economic consumption or performance.
  • Prepayments (Deferred Expenses): Cash is paid before the expense is consumed. It creates a temporary asset.
  • Accruals (Accrued Expenses): Consumption occurs before cash is paid. It creates a temporary liability.

3. Financial Statement Classifications
Adjusting entries update accounts before final reporting to prevent distorted profit figures:
+--------------------+-------------------------+------------------------------------------+

| Adjustment Type    | Financial Impact        | Balance Sheet Classification             |
+--------------------+-------------------------+------------------------------------------+

| Accrued Expense    | Increases Expenses      | Current Liability                         |
+--------------------+-------------------------+------------------------------------------+

| Prepaid Expense    | Decreases Expenses      | Current Asset                            |
+--------------------+-------------------------+------------------------------------------+

| Accrued Income     | Increases Income        | Current Asset                            |
+--------------------+-------------------------+------------------------------------------+

| Unearned Income    | Decreases Income        | Current Liability                         |
+--------------------+-------------------------+------------------------------------------+

 
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