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:yes
Explanation:
Accounting equation=
Assets= Equity+Liabilities
If you purchased 1000₹ prepaid insurance while assuming equity is 5000₹, liabilities is 5000₹ and assets is 10000₹ then substituting this into the formula we get,
Prepaid insurance expense 1000₹ Asset
To bank 1000₹ Asset
10000-1000+1000= 5000+5000
Here -1000₹ because cash/bank is used to pay for insurance purchase. +1000₹ because prepaid insurance is added as an asset.
Similarly, substitute the commission received into equation, sales commission received is an income which increases cash balance by 2800₹ and increases equity by 2800₹. So it is balanced.
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