Adjusting entries are seen as deferrals or accruals (Kieso et al., 2019). Deferrals occur when you have prepaid expenses or unearned revenue. Basically, you're spending/receiving the money before the expense occurs or the service is performed. The accruals are also seen as revenue or expenses and occur when you complete the service or incur the expense before receiving the money/paying the bill.

These adjusting entries are necessary so the company can see when and where the deferral or accrual actually occurred. If a company wants to prepay its insurance at the beginning of the year, the company would set the money aside in its prepaid insurance account, but they would still want to allocate the monthly cost in their journal entries. This allows them to move the money each month from their prepaid account to their insurance expense account so they can get an accurate idea of their monthly costs. Same for if they receive money before they complete the service. Once they complete the service, they would want to make sure the money is properly journalized.

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