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Lecture 8

ACCT-311 Lecture Notes - Lecture 8: Accounting Equation, Income Statement, Institute For Operations Research And The Management Sciences

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Sample Transaction #3
The third sample transaction also occurs on December 2 when Joe
contacts an insurance agent regarding insurance coverage for the
vehicle Direct Delivery just purchased. The agent informs him that
$1,200 will provide insurance protection for the next six months. Joe
immediately writes a check for $1,200 and mails it in.
Let's consider this transaction. Using double entry, we know there
must be a minimum of two accounts involved—one (or more) of the
accounts must be debited, and one (or more) must be credited.
Since a check is written, we know that one of the accounts involved is
Cash. Since cash was paid, the Cash account will be credited. (Take
another look at the last TIP.) While we have not yet identified the
second account, what we do know for certain is that the second
account will have to be debited.
At this point we have most of the entry-all we are missing is the name
of the account to be debited:
We know the transaction involves insurance, and a quick look
through the chart of accounts reveals two possibilities:
Prepaid Insurance (an asset account reported on the balance sheet)
and Insurance Expense (an expense account reported on the income
Assets include costs that are not yet expired (not yet used up), while
expenses are costs that have expired (have been used up). Since the
$1,200 payment is for an expense that will not expire in its entirety
within the current month, it would be logical to debit the account
Prepaid Insurance. (At the end of each month, when $200 has
expired, $200 will be moved from Prepaid Insurance to Insurance
The entry in the general journal format is:
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