Final answer:
The recording of interest on a promissory note is an example of accrued revenue, which is income earned but not yet received by the company.
Step-by-step explanation:
The process of recording interest on a promissory note is an example of accrued revenue. This accounting concept applies when a company has earned interest income but has not yet received it. Essentially, it is income that has been recognized by the firm but not yet realized in the form of cash or other assets. Recording this interest adjusts the financial statements to reflect the revenues that have been earned during a period in accordance with the matching principle of accounting.
When a firm borrows money through either banks or bonds, it commits to paying back the principal amount along with interest. The interest represents a cost for the borrower but a revenue for the lender. The lender records this interest revenue over time as it accrues, and this is reflected in the financial statements prior to its actual receipt. This concept ensures that the financial statements provide a true and fair view of the firm's financial performance and position.