Here's an example. Your company lent a supplier $100,000 on December 1. The agreement is for the $100,000 to be repaid on February 28 along with $3,000 of interest for the three months of December through February. As of December 31 your company will not have a transaction/invoice/receipt for the interest it is earning since all of the interest is due on February 28. Without an adjusting entry to accrue the revenue it earned in December, your company's financial statements as of December 31 will not be reporting the $1,000 (one-third of the $3,000 of interest) that it has earned in December. In order for the financial statements to be correct on the accrual basis of accounting, the accountant needs to record an adjusting entry dated as of December 31. The adjusting entry will consist of a debit of $1,000 to Interest Receivable (a balance sheet account) and a credit of $1,000 to Interest Income or Interest Revenue (income statement accounts).
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