Chapter 7, Problem 7.2APR

To determine

Petty cash fund: Petty cash fund is a fund established to pay insignificant amounts like postage, office supplies, and lunches. In day-to-day life, it becomes difficult to use checks for daily expenses. Therefore, companies maintain some minimum amount of funds in the hand for such daily expenses. These funds are called as petty cash funds. These funds are managed by custodian. This system is otherwise called as imprest system.

To journalize: The petty cash transactions.

Explanation of Solution

Journal entry 1: Establish petty cash fund.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
July	1	Petty Cash				1,100
			Cash				1,100
				Open petty cash fund.

Petty Cash is an asset and is increased by $1,100. Therefore, debit the Petty Cash account by $400. Cash is an asset and decreased by $1,100. Therefore, credit the Cash account by $1,100.

Journal entry 2: Record the cash sales.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
July	12	Cash				8,220
			Cash Short and Over				28
			Sales				8,192
				(To record the cash sales.)

Cash is an asset and is increased due to cash sales. Thus, cash is debited with $8,220. Therefore, debit Cash account by $8,220. Sales as per cash records are $8,192. Thus, sales is credited with $8,192. The difference of $28 is credited with $28. Cash short and over is determined as follows:

$\begin{array}{c}\text{Cash short and over = Cash – Sales}\\ \text{= \$8,220 – \$8,192}\\ \text{=\$28}\end{array}$

Journal entry: Replenishment of funds.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
July	31	Store Supplies				580
		Delivery Expense				225
		Office Supplies				140
		Miscellaneous Administrative Expense				88
		Cash Short and Over				20
			Cash				1,053
				To record the replenishment of the petty cash fund.

Store supplies and Office Supplies is an asset and it increases the value of asset. Therefore, debit store supplies and office supplies by $580 and $140 respectively. Delivery Expense is an expense and it decreases the value of equity. Therefore, debit Delivery Expense by $225. Miscellaneous administrative expenses is an expense and decreases the equity by $88. Thus, debit miscellaneous administrative expense with $88. Cash Short and Over decreases the value of equity. The cash is short by $20. Therefore, debit Cash Short and Over by $20. Cash is an asset and decreased by $1,053. Therefore, credit the cash account by $1,053.

Working notes for cash spent and cash short and over are provided below:

Calculate the cash spent as below:

$\begin{array}{c}\text{Cash spent= }\left(\begin{array}{l}\text{Petty cash fund}–\text{Amount in petty }\\ \text{cash fund after expenses}\end{array}\right)\\ =\$1,100–\$47\\ =\$1,053\end{array}$

Calculate the total payments.

Payments	Amount ($)
Store Supplies	580
Delivery Expense	225
Office Supplies	140
Miscellaneous Administrative Expense	88
Total payments	1,033

Next, calculate cash short and over.

$\begin{array}{c}\text{Cash short and over }=\text{ Total cash payments – Cash }\\ \text{=}\$1053–\$1033\\ =\left(\$20\right)\end{array}$

Determining of petty cash before replenishment involves two steps. First, calculate the total payments. Then determine the difference between imprest balance and total payments. This amount is petty cash fund before replenishment.  Office supplies include amount spent for two boxes of stationery, and printer cartridges. Entertainment expense include office party and dinner expenses.

Journal entry 2: Record the cash sales.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
July	12	Cash				10,232
		Cash Short and Over				9
			Sales				10,241
				(To record the cash sales.)

Cash is an asset and is increased due to cash sales. Thus, cash is debited with $10,232. Therefore, debit Cash account by $10,232. The difference of $9 and is debited.  Sales as per cash records are $10,241. Thus, sales is credited with $10,241. Cash short and over is determined as follows:

$\begin{array}{c}\text{Cash short and over = Cash – Sales}\\ \text{= \$10,232 – \$10,241}\\ \text{=\$9}\end{array}$

Journal entry 1: Decrease in petty cash

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
July	1	Cash				150
			Petty cash				150
				Open petty cash fund.

Petty Cash is an asset and is increased by $1,100. Therefore, debit the Petty Cash account by $400. Cash is an asset and decreased by $1,100. Therefore, credit the Cash account by $1,100.