Final answer:
The adjusting entry to record revenue that has been billed but not recorded on December 31 is correct: debit accounts receivable and credit fees earned. This true entry aligns with the accrual accounting principles, ensuring revenue is recorded in the period it is earned.
Step-by-step explanation:
When a company realizes that the last two days’ revenue for the month was billed but not recorded, the correct adjusting entry on December 31 would be a debit to accounts receivable and a credit to fees earned. This is because the revenue has been earned but not yet recorded in the accounting books. When we make this adjustment, we recognize that the services have been provided, and hence the company has a right to receive the revenue. This entry ensures the revenue is reflected in the financial statements for the accurate period under the accrual basis of accounting, thereby adhering to the matching principle.
The scenario provided exemplifies the importance of accurate bookkeeping and vigilant oversight. Noel's action of flagging a significant billing error exemplifies the vigilance needed in the accounting and billing processes. In both Noel's scenario and the question about the adjusting entry, it is essential to monitor and correct records to avoid misstating financial positions. If a company doesn't make the necessary adjusting entries, the financial statements will not present a fair view of its financial health, thereby misleading stakeholders.
Adjusting entries is essential at the end of an accounting period before the financial statements are prepared. They ensure that the company's revenue and expenses are recorded in the appropriate period, which is crucial for maintaining accurate and reliable financial records. As such, the adjusting entry would indeed involve debiting accounts receivable and crediting fees earned to address unrecorded revenue.