Multiple Choice
Which of the following journal entries correctly records an owner's draw of $5,000 from the business?
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2. Transaction Analysis
Journal Entries: Debits and Credits
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If an accident results in $8,000 in direct costs that are paid in cash, which of the following is the correct journal entry?
A
Debit Cash $8,000; Credit Accident Expense $8,000
B
Debit Accounts Payable $8,000; Credit Accident Expense $8,000
C
Debit Accident Expense $8,000; Credit Accounts Receivable $8,000
D
Debit Accident Expense $8,000; Credit Cash $8,000
Verified step by step guidance1
Understand the nature of the transaction: The accident resulted in direct costs of $8,000, which were paid in cash. This means cash is decreasing, and an expense account (Accident Expense) is increasing.
Recall the accounting equation: Assets = Liabilities + Equity. Cash is an asset, and expenses reduce equity. Therefore, the transaction affects both the asset (Cash) and the equity (via the expense account).
Determine the journal entry format: In double-entry accounting, every transaction requires a debit and a credit. Expenses are debited because they increase, and cash is credited because it decreases.
Apply the rules of debits and credits: Debit Accident Expense $8,000 (to record the expense incurred) and Credit Cash $8,000 (to reflect the payment made in cash).
Verify the journal entry: Ensure the debit and credit amounts are equal ($8,000), maintaining the balance in the accounting equation. The correct journal entry is Debit Accident Expense $8,000; Credit Cash $8,000.
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