how can you show Prepaid Insurance in the Accounting Equation? If commission worth Rs. 2800 is received, what will be its effect in the accounting equation?
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Answer:
Oct 7, 2018 - At any given point of time, this equation should match. In this case the commission received, it affects assets and the capital. Hence, Commission amount received will be added to the asset (since cash is coming in) and liability will be added since the equal vent service has be performed.
Explanation:
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We can show this if the given equation is true. The equation being: Assets = Equity + Liabilities.
Explanation:
- Usually prepaid expenses come under the asset side of the balance sheet and at any point of the accounting period the equation should be equal or matched.
- The equation implies that the asset is always equal to the liability and equity. Let’s assume prepaid insurance is 2000 and the assets, liability and equity being 5000, 2000 and 4000 respectively.
- The amount of prepaid insurance will be credited from assets and debited in liability thus, the equation will be 5000 +1000 = 2000+4000-1000.
- The same way commission of Rs. 2800 will be added to assets and liability because there’s an increase in cash and also an increase in capital (Income).
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