Chapter 6, Problem 2PSA

1.

To determine

To prepare: Journal entries in the books of K Company during the month of May.

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 determine

To explain: Affect on financial statements of non replenished petty cash fund and lack of journal entry on May 31.

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.