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10 September, 18:19

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

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  1. 10 September, 20:47
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    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.
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