How should earned interest be adjusted in the company's records?

The earned interest should be added to the cash balance because it represents additional money that the company has earned from its investments or cash holdings. When interest is earned, it increases the company's available cash, reflecting a positive increase in financial resources. This adjustment is necessary to ensure accurate representation of the cash balance on the financial statements. It indicates that the company has received income, which contributes to its overall financial health.

Adding the earned interest to the cash balance aligns with the principles of accrual accounting, where revenues are recognized when they are earned, not when the cash is received. Thus, keeping the cash balance current and reflective of all financial activities is vital for correct financial reporting and analysis.