Cash Payment of Expenses

A cash payment is a transaction in which a business settles the cost of an expense immediately in cash.

Suppose a business has a monthly premises rent of 1,000 and pays the amount in cash to the landlord.

Cash Payment Journal Entry

At the end of the month the business needs to enter the cost of the rent for that period, the cash payment journal entry is as follows:

Cash Payment Journal Entry
Account Debit Credit
Rent expense 1,000
Cash 1,000
Total 1,000 1,000

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Cash Payment – Accounting Equation
Assets = Liabilities + Owners Equity
Cash = None + Reserves
-1,000 = + -1,000

In this case the asset of cash has been decreased by 1,000 and the income statement will have a rent expense of 1,000. The expense in the income statement reduces the net income which reduces the retained earnings and therefore the owners equity in the business.

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