Final answer:
Accrual adjustments for interest earned but not yet collected increase the income on the income statement and the assets on the balance sheet by recognizing income when it's earned and creating a receivable.
Step-by-step explanation:
Accrual adjustments for interest earned but not yet collected can affect both the balance sheet and the income statement of a company. When a company accrues interest that it has earned but has not yet received in cash, it recognizes the revenue on the income statement, reflecting that the company has earned the revenue during the period. As a result, there will be an increase in net income for the period.
On the balance sheet, the company records this interest as an asset, specifically under accounts receivable or interest receivable, which indicates that the company has a claim to cash that it has not yet collected. This accrual increases the total assets on the balance sheet.
For instance, if Singleton Bank accrues $50,000 of interest that it has earned from loans but not yet received by the end of the accounting period, it would record this as <$50,000> in its assets under 'Interest Receivable' and would also record <$50,000> as interest income on the income statement. This recognizes the bank's right to receive cash from the borrower in the future and also reflects the income earned during the period, despite the cash not being physically present in the bank.