Chapter 7, Problem 7.16E

(a)

To determine

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.

To journalize: The petty cash fund transactions in the books of Company K.

Explanation of Solution

Prepare journal entry for the transaction on August 1.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
August	1	Petty Cash		200
		Cash			200
		(To create petty cash fund)

Table (1)

Description:

• Petty Cash is an asset account. The asset 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.

Prepare journal entry for the transaction on August 15.

Date		Account Titles and Descriptions	Post. Ref.	Debit ($)	Credit ($)
August	15	Freight-out		74.40
		Entertainment Expense		36.00
		Postage Expense		33.70
		Miscellaneous Expense		27.50
		Cash Short and Over		3.40
		Cash			175.00
		(To record replenishment of petty cash fund)

Table (2)

Description:

• Freight-out is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Entertainment 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.
• 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 $3.40 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.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$200 – \$25}\\ \text{= \$175}\end{array}$ (1)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Freight-out	74.40
Entertainment Expense	36.00
Postage Expense	33.70
Miscellaneous Expense	27.50
Total expenses	$171.60

Table (3)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash short and over = Cash spent – Total expenses}\\ \text{= \$175 – \$171}\text{.60}\\ \text{= \$3}\text{.40}\end{array}$

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

Prepare journal entry for the transaction on August 16.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
August	16	Petty Cash		200
		Cash			200
		(To create petty cash fund)

Table (4)

Description:

• Petty Cash is an asset account. The asset 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.

Prepare journal entry for the transaction on August 31.

Date		Account Titles and Descriptions	Post Ref.	Debit ($)	Credit ($)
August	31	Postage Expense		145.00
		Entertainment Expense		90.60
		Freight-out		46.40
		Cash Short and Over		1.00
		Cash			283.00
		(To record replenishment of petty cash fund)

Table (5)

Description:

• Postage Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Entertainment Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Freight-out 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 $1.00 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.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$400 – \$117}\\ \text{= \$283}\end{array}$ (2)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Postage Expense	145.00
Entertainment Expense	90.60
Freight-out	46.40
Total expenses	$282.00

Table (6)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash short and over = Cash spent – Total expenses}\\ \text{= \$283 – \$282}\\ \text{= \$1}\text{.00}\end{array}$

Note: Refer to Equation (2) and Step (1) for values and computations of amount of cash spent and total expenses.

(b)

To determine

To post: the transactions to petty cash account.

Explanation of Solution

Post the amounts of journal entries to Petty Cash account.

Petty Cash account

Date	Particulars	Debit ($)	Credit ($)	Balance
				Debit ($)	Credit ($)
August 1	Cash	200		200
August 16	Cash	200		400

Table (7)

(c)

To determine

The internal control features of petty cash fund.

Explanation of Solution

The following are the internal control features of petty cash fund:

• Authorizing the responsibility of custody of cash fund
• Documenting and recording the petty cash receipt which is pre-numbered
• Periodic independent verification at the time of approving the request for replenishment