Concept explainers
1.
Journalize the petty cash fund transactions in the books of Corporation M.
1.
Explanation of Solution
Petty cash fund: Petty cash fund is a fund established to pay insignificant amounts like postage, office supplies, and lunches.
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Journalize the establishment of petty cash fund transaction on January 3.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
January | 3 | Petty Cash | 150.00 | |||
Cash | 150.00 | |||||
(Record establishment of petty cash fund) |
Table (1)
Description:
- Petty Cash is an asset account. Since cash is deposited in the petty cash account, asset value is increased, and an increase in asset is debited.
- Cash is an asset account. The amount has decreased because cash is transferred to Petty Cash account. The asset is decreased, and a decrease in asset is credited.
Journalize the replenishment of petty cash fund transaction on January 14.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
January | 14 | Office Supplies Expenses | 14.29 | |||
Merchandise Inventory | 19.60 | |||||
Repairs Expense | 38.57 | |||||
Miscellaneous Expenses | 12.82 | |||||
Cash Short and Over | 2.44 | |||||
Cash | 87.72 | |||||
(Record replenishment of petty cash fund) |
Table (2)
- Office Supplies Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
- Merchandise Inventory is an asset account. Transportation-in charges are related to merchandise, so these expenses are charged to merchandise inventory in perpetual inventory system. Hence, value of asset is increased, and an increase in asset is debited.
- Repairs Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
- Miscellaneous Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
- Cash Short and Over is a stockholders’ equity account. The increase (overage) is credited and decrease (shortage) is debited. Hence, debit Cash Short and Over account with $2.44 indicating less amount of cash balance.
- Cash is an asset account. Since the expenditures are recognized from petty cash fund petty cash is decreased, and a decrease in asset is credited.
Working Notes:
Calculate cash spent.
Calculate cash short and over amount.
Step 1: Calculate the total of expenses.
Particulars | Amount ($) |
Office Supplies Expenses | 14.29 |
Merchandise Inventory | 19.60 |
Repairs Expense | 38.57 |
Miscellaneous Expenses | 12.82 |
Total expenses | $85.28 |
Table (3)
Step 2: Calculate the cash and short over amount.
Note: Refer to Equation (1) and Table (3) for values and computations of amount of cash spent and total expenses.
Journalize the increase in petty cash fund transaction on January 15.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
January | 15 | Petty Cash | 50 | |||
Cash | 50 | |||||
(Record increased amount of petty cash fund) |
Table (4)
Description:
- Petty Cash is an asset account. Since cash is deposited in the petty cash account, asset value is increased, and an increase in asset is debited.
- Cash is an asset account. The amount has decreased because cash is transferred to Petty Cash account. The asset is decreased, and a decrease in asset is credited.
Journalize the replenishment of petty cash fund transaction on January 31.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
January | 31 | Advertising Expense | 50.00 | |||
Postage Expenses | 48.19 | |||||
Delivery Expense | 78.00 | |||||
Cash Short and Over | 6.46 | |||||
Cash | 182.65 | |||||
(Record replenishment of petty cash fund) |
Table (5)
- Postage Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
- Mileage Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
- Delivery Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
- Cash Short and Over is a stockholders’ equity account. The increase (overage) is credited and decrease (shortage) is debited. Hence, debit Cash Short and Over account with $6.46 indicating less amount of cash balance.
- Cash is an asset account. Since the expenditures are recognized from petty cash fund petty cash is decreased, and a decrease in asset is credited.
Working Notes:
Calculate cash spent.
Calculate cash short and over amount.
Step 1: Calculate the total of expenses.
Particulars | Amount ($) |
Advertising Expense | $50.00 |
Postage Expense | 48.19 |
Delivery Expense | 78.00 |
Total expenses | $176.19 |
Table (6)
Step 2: Calculate the cash and short over amount.
Note: Refer to Equation (2) and Table (6) for values and computations of amount of cash spent and total expenses.
Journalize the increase in petty cash fund transaction on January 31.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
January | 31 | Petty Cash | 50 | |||
Cash | 50 | |||||
(Record increased amount of petty cash fund) |
Table (7)
Description:
- Petty Cash is an asset account. Since cash is deposited in the petty cash account, asset value is increased, and an increase in asset is debited.
- Cash is an asset account. The amount has decreased because cash is transferred to Petty Cash account. The asset is decreased, and a decrease in asset is credited.
2.
Explain the effect of petty cash being not replenished on January 31, on the financial statements of Corporation M.
2.
Explanation of Solution
Effect: If the entry for replenishment of petty cash fund is not recorded, the petty expenses of $182.65 (Equation (2)), for which cash is paid would not be included in the net income and
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