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 Description			Post Ref	Debit ($)	Credit ($)
October	1	Petty Cash				750
			Cash				750
				Open petty cash fund.

Description: Petty Cash is an asset and is increased by $750. Therefore, debit the Petty Cash account by $750. Cash is an asset and decreased by $750. Therefore, credit the Cash account by $750.

Journal entry 2: Record the cash sales.

Date		Account Title and Description			Post Ref	Debit ($)	Credit ($)
October	12	Cash				12,465
			Cash Short and Over				25
			Sales				12,440
				(To record the cash sales.)

Description: Cash is an asset and is increased due to cash sales. Thus, cash is debited with $12,465. Therefore, debit Cash account by $12,465. Sales as per cash records are $12,465.Thus, sales is credited with $12,440. The difference of $25 is credited as Cash short and over.

Working note for determining cash short and over is as below:

$\begin{array}{c}\text{Cash short and over = Cash – Sales}\\ \text{= \$6,180 – \$6,148}\\ \text{=\$32}\end{array}$

Journal entry: Replenishment of funds.

Date		Account Title and Description			Post Ref	Debit ($)	Credit ($)
October	31	Store Supplies				390
		Delivery Expense				90
		Office Supplies				56
		Miscellaneous Administrative Expense				42
		Cash Short and Over				15
			Cash				593
				(To record the replenishment of the petty cash fund.)

Description: Store supplies and Office Supplies is an asset and it increases the value of asset. Therefore, debit store supplies and office supplies by $390 and $56 respectively. Delivery Expense is an expense and it decreases the value of equity. Therefore, debit Delivery Expense by $90. Miscellaneous administrative expenses are an expense. It decreases the equity by $42. Thus, debit miscellaneous administrative expense with $42. Cash Short and Over decreases the value of equity. The cash is short by $15. Therefore, debit Cash Short and Over by $15. Cash is an asset and decreased by $593. Therefore, credit the cash account by $593.

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

Calculate the cash spent as below:

$\begin{array}{c}\text{Cash spent= }\left(\begin{array}{l}\text{Petty cash fund}–\text{Amount in petty }\\ \text{cash fund after expenses}\end{array}\right)\\ =\$750–\$157\\ =\$593\end{array}$

Calculate the total payments.

Payments	Amount ($)
Store Supplies	390
Delivery Expense	90
Office Supplies	56
Miscellaneous Administrative Expense	42
Total payments	578

Next, calculate cash short and over.

$\begin{array}{c}\text{Cash short and over }=\text{ Total cash payments – Cash }\\ \text{=}\$593–\$578\\ =15\end{array}$

Description: 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.

Journal entry 2: Record the cash sales.

Date		Account Title and Description			Post Ref	Debit ($)	Credit ($)
October	31	Cash				18,780
		Cash Short and Over				40
			Sales				18,820
				(To record the cash sales.)

Description: Cash is an asset and is increased due to cash sales. Thus, cash is debited with $18,780. Therefore, debit Cash account by $18,780. The difference of $40 and is debited.  Sales as per cash records are $18,820.Thus, sales is credited with $18,820. Cash short and over is determined as follows:

$\begin{array}{c}\text{Cash short and over = Cash – Sales}\\ \text{= \$18,780 – \$18,820}\\ \text{=\$}\left(\text{40}\right)\end{array}$

Journal entry 1: Decrease in petty cash

Date		Account Title and Description			Post Ref	Debit ($)	Credit ($)
October	31	Cash				100
			Petty cash				100
				(Open petty cash fund.)

Description: Cash is an asset and increased by $100. Therefore, debit Cash account with $100. Petty cash is an asset and decreased with $100. Thus, credit petty cash account with $100.