Chapter 6, Problem 1MCQ

To determine

Find the correct option, the option that explains the entry for replenishment of petty cash fund.

Answer to Problem 1MCQ

The correct answer is option (e).

Explanation of Solution

Petty cash fund: Petty cash fund is a fund established to pay insignificant amounts like postage, office supplies, and lunches.

Prepare journal entry for the replenishment of petty cash fund.

Date		Account Titles and Explanations	Post. Ref.	Debit ($)	Credit ($)
		Expenses		420
		Cash Short and Over		5
		Cash			425
		(Record replenishment of petty cash fund)

Table (1)

Description:

• Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Cash Short and Over is an income statement (expense or revenue) account. The increase (overage) is credited and recorded as Revenue, and decrease (shortage) is debited and recorded as Expense. Hence, debit Cash Short and Over account with $5 indicating an expense.
• Cash is an asset account. Since the expenditures are recognized from petty cash fund petty cash is decreased, and a decrease in asset is credited.

Working Notes:

Calculate cash spent.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$500 – \$75}\\ \text{= \$425}\end{array}$ (1)

Calculate cash short and over amount.

$\begin{array}{c}\text{Cash short and over = Cash spent – Total expenses}\\ \text{= \$425 – \$420}\\ \text{= \$5}\end{array}$

Note: Refer to Equation (1) for value and computation of amount of cash spent.

Hence, option (e) is correct.

Conclusion

Hence, options (a), (b), (c), and (d) are incorrect, and the option (e) is the correct answer.