Final answer:
The question pertains to accounting practices regarding unearned revenue and adjusting entries as per the accrual accounting principle. Smart Touch Learning needs to record an adjusting entry to recognize revenue earned in December from the cash received in advance. The lack of this entry would violate the revenue recognition principle.
Step-by-step explanation:
The subject of this question involves the concept of unearned revenue and adjusting entries in accrual accounting. When Smart Touch Learning receives payment in advance for services that will be performed over several months, it is initially considered unearned revenue, a liability, because the service has not yet been provided. According to the accrual basis of accounting, income must be recognized in the period it is earned, regardless of the timing of the cash flow.
By not recording an adjusting entry at the end of December, Smart Touch Learning would fail to comply with the revenue recognition principle, which dictates that revenue should be recognized when earned, not when cash is received. Therefore, an adjusting entry should be made on December 31 to recognize revenue for services that were performed during December. This entry would involve debiting the Unearned Revenue account to decrease the liability and crediting the Service Revenue account to recognize the revenue earned during that month.