Multiple Choice
Given the following journal entry:
\[
\begin{align*}
\text{Cash} \quad & \text{Debit} \quad \$5,000 \\
\text{Service Revenue} \quad & \text{Credit} \quad \$5,000
\end{align*}
\]
What does this journal entry describe?
1
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2. Transaction Analysis
Journal Entries: Debits and Credits
Multiple Choice
When an insurance company makes a payment to a business for an insured loss, how should the business record this transaction in its journal entries?
A
Debit Cash; Credit Insurance Revenue
B
Debit Insurance Payable; Credit Cash
C
Debit Accounts Receivable; Credit Insurance Expense
D
Debit Insurance Expense; Credit Cash
Verified step by step guidance1
Understand the nature of the transaction: The insurance company is compensating the business for an insured loss. This payment represents income or revenue for the business, as it offsets the loss incurred.
Determine the accounts involved: The business is receiving cash from the insurance company, so the 'Cash' account will be debited to reflect the increase in cash. The corresponding credit will be made to an account that represents the revenue generated from the insurance payment, typically 'Insurance Revenue'.
Analyze the journal entry structure: In accounting, debits increase asset accounts (like Cash), while credits increase revenue accounts (like Insurance Revenue). This aligns with the nature of the transaction.
Write the journal entry: Debit the 'Cash' account to record the increase in cash received. Credit the 'Insurance Revenue' account to record the income generated from the insurance payment.
Review the other options provided: The other options involve accounts like 'Insurance Payable', 'Accounts Receivable', and 'Insurance Expense', which are not relevant to this transaction. Ensure the correct accounts are used based on the nature of the payment.
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