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Let's do another adjusting entry example, and for this one, let's use interest receivable. Let's take a look. On December 31, interest of $1,200 has been earned but not yet received. Record the adjusting entry for December 31. This "earned" should ring bells in your head of revenue. Whenever you see earned, that means revenue. If we earned it, it's revenue. And the other thing is we have not received it, but it is able to be received because we earned it. So on December 31, we have interest that is owed to us, so it is interest receivable, interest that is able to be received, of $1,200, and we also have interest revenue because we earned the interest, so we have $1,200 in interest revenue.
Now, let's say it gets paid, I don't know, January 5. When it gets paid, what we do is we take our cash, and we increase it by $1,200, and then we take this receivable, and we decrease it. So we have the interest receivable, and we take that down by $1,200. So you can see that if this transaction wasn't split by the end of the year, so we had to record the adjusting entry because we were closing the books. The year was over. You can see that these guys right here just cancel each other out. But because they're separated in time, we have to put it into this holding area, into this receivable bucket.
But really, when you collapse them down, you have a revenue of $1,200 and a cash of $1,200. But because it's split over the year, we put it into the bucket, and then we take it out of the bucket.