Concept explainers
1.
To prepare: Journal entries in the books of K Company during the month of May.
1.
Explanation of Solution
To establish the fund on May 1.
Date |
Account Title and Explanation |
Post ref |
Debit ($) |
Credit ($) |
May 1 |
Petty Cash |
300 |
||
Cash |
300 |
|||
|
(To establish petty cash fund) |
- Petty cash is an asset account, when it increases it gets debited. Here, cash is added to petty cash so; petty cash account is increased and debited by $300.
- Cash is also an asset account. Cash has gone out of the bank so it is decreased. Hence, cash account credited by $300.
To replenish petty cash on May 15.
Date |
Account Title and Explanation |
Post ref |
Debit ($) |
Credit ($) |
May 15 |
Service expenses |
88 |
||
Miscellaneous expenses |
53.68 |
|||
Postage expenses |
53.50 |
|||
Advertising expenses |
47.15 |
|||
Cash |
237.85 |
|||
Cash over and short |
4.48 |
|||
|
(To replenish petty cash) |
- All expenses have debit balance. Expenses increase and get debited. So, given in the question service, Miscellaneous, postage and advertising expenses $88, $53.68, $53.50, and $47.15 respectively are debited.
- Cash is an asset account. Cash has gone out of the bank so it is decreased. Hence, cash is credited with $237.85.
- $62.15 is in the cash box out of total petty cash fund $300. This implies $237.85 ($300-$62.15) should have spent. Since actual expenses are $242.33 and spent $237.85, difference of this $4.48 is credited to the ‘Cash over and short’ account.
To increase petty cash on May16.
Date |
Account Title and Explanation |
Post ref |
Debit ($) |
Credit ($) |
May 16 |
Petty Cash |
200 |
||
Cash |
200 |
|||
|
(To increase petty cash fund by $200) |
- Petty cash is an asset. When it increases it gets debited. So, here petty cash increases by $200. Thus petty cash account gets debited.
- Cash is also an asset. When it decreases it gets credited. So, here cash decreases. Thus cash account gets credited.
To replenish petty cash on May 31.
Date |
Account Title and Explanation |
Post ref |
Debit ($) |
Credit ($) |
May 31 |
Postage expenses |
147.36 |
||
Mileage expenses |
23.50 |
|||
Transportation expenses |
34.75 |
|||
Cash |
205.61 |
|||
|
(To replenish petty cash) |
- All expenses have debit balance. Expenses increase and get debited. So, given in the question postage, mileage, and transportation expenses $147.36, $23.50 and $34.75 respectively are debited.
- Cash is an asset account. Cash has gone out of the bank so it is decreased. Hence, cash is credited with $205.61.
To reduce petty cash fund on May31.
Date |
Account Title and Explanation |
Post ref |
Debit ($) |
Credit ($) |
May 16 |
Cash |
100 |
||
Petty Cash |
100 |
|||
|
(To decrease petty cash fund by $100) |
- Cash is an asset. When it increases it gets debited. So, here cash increased. Thus cash account gets debited.
- Petty cash is also an asset. When it decreases it gets credited. So, here petty cash reduced by $100. Thus petty cash account gets credited.
2.
To explain: Affect on financial statements of non replenished petty cash fund and lack of
2.
Explanation of Solution
- In such case where petty cash does not replenished on May 31 also no entry made on the same date, K Company will have a petty cash limit of $500 however actual cash in the box is $62.50.
- There would be difference between actual cash available and petty cash maintained limit.
- Due to expenses not replenished out of petty cash, financial statements would affect by the same.
Hence, this creates inaccuracy in the records maintained and not matches with the actual cash balance available.
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