The adjusting entry to be passed is to debit the interest receivable account and credit the interest income account.
The income that has been earned but not collected or recieved is called accrued income. So in this case the interest is called accrued interest. This is a type of deferred income as per the laws of accounts and an adjusting entry requires to be made unless the settlement of the interest account takes place.
So, the entry will be written as:
Interest receivable
To, Interest Income
(To record the accrued interest income)
The accrual incomes help to increase the value of assets in the balance sheet as they help to increase the revenue earned. So the revenues in this case the interest that is earned and has not been collected or recorded have to be adjusted for at the end of the year by passing the above journal entry.
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