If an accident results in \$8,000 in direct costs that are paid in cash, which of the following is the correct journal entry?

• A. Debit Cash \$8,000; Credit Accident Expense \$8,000
• B. Debit Accounts Payable \$8,000; Credit Accident Expense \$8,000
• C. Debit Accident Expense \$8,000; Credit Accounts Receivable \$8,000
• D. Debit Accident Expense \$8,000; Credit Cash \$8,000

Answer: (D)

Verified step by step guidance

1. Understand the nature of the transaction: The accident resulted in direct costs of \$8,000, which were paid in cash. This means cash is decreasing, and an expense account (Accident Expense) is increasing.
2. Recall the accounting equation: Assets = Liabilities + Equity. Cash is an asset, and expenses reduce equity. Therefore, the transaction affects both the asset (Cash) and the equity (via the expense account).
3. Determine the journal entry format: In double-entry accounting, every transaction requires a debit and a credit. Expenses are debited because they increase, and cash is credited because it decreases.
4. Apply the rules of debits and credits: Debit Accident Expense \$8,000 (to record the expense incurred) and Credit Cash \$8,000 (to reflect the payment made in cash).
5. Verify the journal entry: Ensure the debit and credit amounts are equal (\$8,000), maintaining the balance in the accounting equation. The correct journal entry is Debit Accident Expense \$8,000; Credit Cash \$8,000.