What is the appropriate adjusting journal entry on December 31 for Rehabilitation, Inc.?

The correct entry is made to accurately reflect the revenue that has been earned during the accounting period, even if payment was received in advance. In this case, when Rehabilitation, Inc. recognizes that it has fulfilled its obligations related to the unearned revenue, it must adjust its accounts accordingly.

This involves debiting (decreasing) Unearned Revenue, which represents the liability on the balance sheet for the cash received in advance. By doing this, the business is acknowledging that it no longer has an obligation to provide services or goods for that amount and is therefore earning the revenue.

At the same time, the business credits (increases) Revenue, which reflects the increase in earned income on the income statement. This transformation from unearned revenue to earned revenue is essential for presenting an accurate financial picture of the company's performance.

The focus here is on the transition between the liability of unearned revenue and the recognition of earned revenue, which is a fundamental process in accrual accounting principles. This process ensures that financial statements present a true and fair view of the company's financial position and performance during the reporting period.