Chapter 6, Problem 2PSB

1.

To determine

To prepare: Journal entries in the books of M Company during the month of January.

Explanation of Solution

To establish the fund Jan 3:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan.3	Petty Cash		150
	Cash			150
	(To establish petty cash fund)
Table (1)

• 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 $150.
• Cash is also an asset account. Cash has gone out of the bank so it is decreased. Hence, Cash account credited by $150.

To replenish petty cash fund on Jan 14 (a to e):

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan.14	Office supplies expenses		14.9
	Merchandise inventory		19.60
	Repair expenses-computer		38.57
	Miscellaneous expenses		12.82
	Cash over and short		2.44
	Cash			87.72
	(To replenish petty cash fund)
Table (2)

• All expenses have debit balance. Expenses increase and get debited. So, given in the question office supplies expenses, merchandise inventory, repair expenses-computer, and miscellaneous expenses $14.9, $19.60, $38.57, and $12.82 respectively are debited.
• $62.28 is in the cash box out of total petty cash fund $150. This implies $87.72 ($150-$62.28) cash is available to spend. Since actual expenses are $85.28 and spent $87.72, difference of this $2.44 is debited to the ‘Cash over and short’ account.
• Cash is an asset account. Cash has gone out of the bank so it is decreased. Hence, Cash is credited with $87.72.

To increase petty cash on Jan15.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 15	Petty Cash		50
	Cash			50
	(To increase petty cash fund)
Table (3)

• Petty Cash is an asset. When it increases it gets debited. So, here petty cash increases by $50. 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 Jan 31

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan.31	Advertising expenses		50
	Postage expenses		48.19
	Delivery expenses		78
	Cash over and short		6.46
	Cash			182.65
	(To replenish petty cash)
Table (4)

• All expenses have debit balance. Expenses increase and get debited. So, given in the question advertising expenses, postage expenses and delivery expenses $50, $48.19 and $78 respectively are debited.
• $17.35 should be in the petty cash box out of total petty cash fund $200 which is increased fund. This implies $182.65 ($200-$17.35) cash is available to spend. Since actual expenses are $176.19 and spent $182.65, difference of this $6.46 is debited to the ‘Cash over and short’ account.
• Cash is an asset account. Cash has gone out of the bank so it is decreased. Hence, cash is credited with $182.65.

To increase petty cash on Jan31

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 31	Petty Cash		50
	Cash			50
	(To increase petty cash fund)
Table (5)

• Petty cash is an asset. When it increases it gets debited. So, here petty cash increases by $50. 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.

2.

To determine

To explain: Affect on financial statements of not replenished petty cash fund and lack of journal entry on January 31.

Explanation of Solution

Affect on financial statements:

• In such case where petty cash does not replenished on January 31 also no entry made on the same date, M Company will have a petty cash limit of $200 however actual cash in the petty cash box is $17.35.
• There would be difference between actual cash available and petty cash maintained limit.
Thus, petty cash asset and total assets would be overstated by $182.65 $\left(\$50+\$48.19+\$78+\$6.46\right)$