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:
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.
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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Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.