AIPB Adjusting Entries Practice Test 2025 – Complete Exam Prep

Interest earned on a money market account is recorded with an adjusting entry because the interest typically accrues over time and needs to be recognized at the end of an accounting period, even if it has not yet been received. This ensures that the financial statements reflect the accurate income earned during that period, in accordance with the accrual basis of accounting.

The adjusting entry is necessary to properly match the interest income to the period in which it was earned, which adheres to the revenue recognition principle. This principle mandates that income should be recognized when it is earned, not when it is received in cash.

In addition, since the interest may not be part of a normal transaction that affects the cash flow immediately (as it is often credited to the account at a later date), a simple normal transaction entry when cash is received would not accurately represent the financial position at the end of the accounting period.