Why are Adjusting Journal Entries necessary in accounting?

Adjusting Journal Entries are crucial in accounting because they ensure that the financial statements accurately reflect the company's financial position and performance over a given period. The main purpose of these entries is to adhere to the accrual basis of accounting, which requires that revenues and expenses be recognized when they are earned or incurred, rather than when cash is exchanged.

In this context, option C is correct as it highlights the necessity of matching revenues with the corresponding expenses that may be recorded in different periods due to timing differences in cash flows. For example, a company might earn revenue in one accounting period while receiving the cash payment in the next. Without adjusting entries, the financial records would not accurately reflect the true economic activity of the company, leading to misleading financial statements.

In addition to matching revenue and expenses, adjusting entries may also be made to account for accrued revenues, accrued expenses, and deferred items, which further enhances the accuracy of the financial reporting process.