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This video explains how to prepare adjusting entries to properly record revenues and expenses in the period they are earned or incurred. Companies make adjusting entries at the end of each accounting period to convert their records to the accrual basis of accounting. The main purpose is to match incomes and expenses to the appropriate periods. Each adjusting entry involves one income statement account and one balance sheet account. Deferrals are classified as prepaid expenses (expenses paid in advance) and unearned revenues (revenues received in advance). Accruals are classified as accrued revenues (revenues for services performed) and accrued expenses.