How should an annual business license fee be recorded in a journal entry?

• A. Debit Accounts Payable; Credit License Expense
• B. Debit Cash; Credit License Expense
• C. Debit License Expense; Credit Cash
• D. Debit License Expense; Credit Revenue

Answer: (C)

Verified step by step guidance

1. Understand the nature of the transaction: An annual business license fee is an expense incurred by the business, typically paid in cash. This means it should be recorded as an expense and a reduction in cash.
2. Identify the accounts involved: The two accounts affected are 'License Expense' (an expense account) and 'Cash' (an asset account).
3. Determine the correct journal entry: Expenses are recorded as debits because they decrease equity, and cash payments are recorded as credits because they reduce the asset account.
4. Write the journal entry: Debit 'License Expense' to recognize the cost incurred, and Credit 'Cash' to reflect the payment made.
5. Review the entry for accuracy: Ensure the debit and credit amounts are equal and correctly reflect the transaction.