Sept 29, Year 2 Purchased a one-year public liability insurance policy for $5,000. The policy becomes effective at 12:01 a.m. October 1, Year 2.
journalize the transaction
To journalize the transaction of purchasing a one-year public liability insurance policy for $5,000 that becomes effective at 12:01 a.m. on October 1, Year 2, you would follow these steps:
1. Determine the accounts involved: In this case, we have an insurance policy purchase, so the accounts affected are Insurance and Cash.
2. Identify the type of accounts affected: Insurance is an expense account, and Cash is an asset account.
3. Determine the direction of the impact on each account: Since we are purchasing the insurance policy, Cash will decrease, and Insurance will increase.
4. Record the journal entry: You would record the journal entry as follows:
Date: Sept 29, Year 2
Account Debit Credit
Insurance $5,000
Cash $5,000
Explanation: The insurance expense is debited because it increases with the purchase of the policy. Cash is credited because it decreases due to paying $5,000 for the insurance.
Please note that this is a general guideline for journalizing this transaction, but it is advisable to consult with an accountant or follow the specific accounting system and principles used in your business.