When taking out student loans, which of the following is the correct initial journal entry to record the transaction?

• A. Debit Interest Expense; Credit Cash
• B. Debit Prepaid Expense; Credit Student Loan Payable
• C. Debit Student Loan Payable; Credit Cash
• D. Debit Cash; Credit Notes Payable

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of the transaction. Taking out a student loan involves receiving cash from the lender, which increases the cash account (an asset). At the same time, it creates a liability in the form of a loan payable, which is recorded as Notes Payable.
2. Step 2: Recall the basic accounting principle of double-entry bookkeeping. Every transaction affects at least two accounts, and the total debits must equal the total credits.
3. Step 3: Identify the accounts involved. In this case, the accounts are 'Cash' (an asset account) and 'Notes Payable' (a liability account). Cash increases, so it is debited, and Notes Payable increases, so it is credited.
4. Step 4: Write the journal entry. The format for the journal entry is: Debit Cash (to record the increase in cash) and Credit Notes Payable (to record the increase in liability).
5. Step 5: Ensure the journal entry reflects the correct amounts. The debit to Cash and the credit to Notes Payable should be equal to the amount of the loan received, maintaining the balance in the accounting equation: Assets = Liabilities + Equity.