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.
