Chapter 6, Problem 3AP

(1)

To determine

Journalize the establishment of petty cash fund transaction on February 2, in the books of N Gallery.

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 February 2.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
February	2	Petty Cash			400
			Cash			400
		(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.

2.

To determine

Prepare a petty cash report of N Gallery for the month of February.

Explanation of Solution

Prepare a petty cash report of N Gallery for the month of February.

N Gallery
Petty Cash Report
For the Month of February
Delivery Expense
February 23	Customer’s merchandise delivered		$20.00
Mileage Expense
February 14	Reimbursed mileage on car		68.00
Postage Expense
February 12	Client’s contract delivered	$7.95
February 27	Purchase of postage stamps	54.00	61.95
Merchandise Inventory (transportation-in)
February 9	Transport of merchandise purchased	32.50
February 25	Transport of merchandise purchased	13.10	45.60
Office Supplies Expense
February 5	Purchase of paper for copier	14.15
February 20	Purchase of stationery	67.77	81.92
Total			$277.47

Table (2)

3.

(a)

To determine

Journalize the reimbursement of petty cash fund transaction on February 28.

Explanation of Solution

Journalize the reimbursement of petty cash fund transaction on February 28.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
February	28	Delivery Expense			20.00
		Mileage Expense			68.00
		Postage Expense			61.95
		Merchandise Inventory			45.60
		Office Supplies Expenses			81.92
		Cash Short and Over			2.11
			Cash			279.58
		(Record replenishment of petty cash fund)

Table (3)

• Delivery 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.
• Postage 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.
• Office Supplies 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 $2.11 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.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$400 – \$120}\text{.42}\\ \text{= \$279}\text{.58}\end{array}$ (1)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Delivery Expense	20.00
Mileage Expense	68.00
Postage Expense	61.95
Merchandise Inventory	45.60
Office Supplies Expenses	81.92
Total expenses	$277.47

Table (4)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash }\left(\text{short}\right)\text{ and over = Total expenses – Cash spent}\\ \text{= \$277}\text{.47 – \$279}\text{.58}\\ \text{= \$}\left(\text{2}\text{.11}\right)\end{array}$

Note: Refer to Equation (1) and Table (4) for values and computations of amount of cash spent and total expenses.

(b)

To determine

Journalize the increase in petty cash fund transaction on February 28.

Explanation of Solution

Journalize the increase in petty cash fund transaction on February 28.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
February	28	Petty Cash			100
			Cash			100
		(Record increased amount of petty cash fund)

Table (5)

Description:

• Petty Cash is an asset account. Since cash of 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.