Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 351

Accounting Terminology

Chapter 14

Transaction 3

Paid cash for insurance, $550

When we look at the three questions discussed earlier, we see

a. The two accounts affected are Cash and Prepaid Insurance.

b. Cash and Prepaid Insurance are both assets.

c. Cash decreases.

Supplies increase.

We see from the accounting equation that we decrease Cash by $550, and since cash is an asset and on

the left side of the accounting equation, when we are using T accounts, we place the $550 on the credit

side of the Cash account as seen below. The second part of the transaction is an increase to prepaid

insurance; since prepaid insurance is an asset and on the left side of the accounting equation, we increase

prepaid insurance by putting $550 on the left side or debit side of the T account. Notice, we ALWAYS have

equal debits and credits.

Assets = Liabilities + Owner’s Equity

Prepaid Insurance

Debit Credit

+ –

550.00

Cash

Debit Credit

+ –

550.00

Assets = Liabilities + Owner’s Equity

Trans.
No.

Cash + Supplies + Accounts

Receivable,

Lisa Cook

+ Prepaid

Insurance

= Accounts

Payable/

Office

Supply

+ Your

Name,

Capital

+ Revenue - Expenses - Drawing

1. 7500 + + + * + 7500 + - -


2. -300
   7200

+ +300 + + - + 7500 + - -

3. -550
   6650

+ 300 + + +550 * + 7500 + - -

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