Question

On April 1, Smart, Inc. paid $7,200 for an insurance premium on a three-year insurance policy. How does this transaction affect Smart's accounts

Answer 1

Answer:

A decrease of $7,200 in the cash account and an increase of the same amount in the prepaid insurance account occurred.

Explanation:

In this case, there are only two accounts available;

1. Prepaid insurance account

2. Cash account

When Smart decided to pay $7,200 for an insurance premium on a three-year policy, he used $7,200 in cash to purchase a prepaid insurance premium at the same cost. This can be illustrated in the table below;

Account type                                     Credit                                Debit

Cash account                                                                             $7,200

Prepaid insurance account              $7,200        

Total                                                   $7,200                             $7,200

From the above illustration, we can conclude that when Smart made a decision to purchase the insurance premium, he debited $7,200 from his cash account and credited $7,200 in his prepaid insurance account.

We can conclude that a decrease of $7,200 in the cash account and an increase of the same amount in the prepaid insurance account occurred.