Chapter 7, Problem 7.2BPR

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 ($)	Credit ($)
January	1	Petty Cash				1,000
			Cash				1,000
				Open petty cash fund.

Table -1

Petty Cash is an asset and is increased by $1,000. Therefore, debit the Petty Cash account by $1,000. Cash is an asset and decreased by $1,000. Therefore, credit the Cash account by $1,000.

Journal entry 2: Record the cash sales.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
January	12	Cash				9,506
			Cash Short and Over				66
			Sales				9,440
				(To record the cash sales.)

Table -2

Cash is an asset and is increased due to cash sales. Thus, cash is debited with $9,506. Therefore, debit Cash account by $9,506. Sales as per cash records are $9,440. Thus, sales is credited with $9,440. The difference of $66 is credited with $66. Cash short and over is determined as follows:

$\begin{array}{c}\text{Cash short and over = Cash – Sales}\\ \text{= \$9,506 – \$9,440}\\ \text{=\$66}\end{array}$

Journal entry 3: Replenishment of funds.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
January	30	Store Supplies				375
		Merchandise inventory				215
		Office Supplies				208
		Miscellaneous Administrative Expense				134
		Cash Short and Over				22
			Cash				954
				To record the replenishment of the petty cash fund.

Table -3

Store supplies and Office Supplies is an asset and it increases the value of asset. Therefore, debit store supplies and office supplies by $375 and $208 respectively. Merchandise inventory is an asset and it increases the value of equity. Therefore, debit Merchandise inventory by $215. Miscellaneous administrative expenses are an expense. It decreases the equity by $134. Thus, debit miscellaneous administrative expense with $134. Cash Short and Over decreases the value of equity. The cash is short by $22. Therefore, debit Cash Short and Over by $22. Cash is an asset and decreased by $954. Therefore, credit the cash account by $954.

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

Calculate the cash spent as below:

$\begin{array}{c}\text{Cash spent= }\left(\begin{array}{l}\text{Petty cash fund}–\text{Amount in petty }\\ \text{cash fund after expenses}\end{array}\right)\\ =\$1,000–\$46\\ =\$954\end{array}$

Calculate the total payments.

Payments	Amount ($)
Store Supplies	375
Merchandise inventory	215
Office Supplies	208
Miscellaneous Administrative Expense	134
Total payments	932

Table -4

Next, calculate cash short and over.

$\begin{array}{c}\text{Cash short and over }=\text{ Total cash payments – Cash }\\ \text{=}\$932–\$954\\ =\left(\$22\right)\end{array}$

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.

Journal entry 4: Record the cash sales.

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
June 30		Cash				13,350
		Cash Short and Over				40
			Sales				13,390
				(To record the cash sales.)

Table -5

Cash is an asset and is increased due to cash sales. Thus, cash is debited with $13,350. Therefore, debit Cash account by $13,350. The difference of $40 and is debited.  Sales as per cash records are $13,390. Thus, sales is credited with $13,390. Cash short and over is determined as follows:

$\begin{array}{c}\text{Cash short and over = Cash – Sales}\\ \text{= \$13,390 – \$13,350}\\ \text{=\$40}\end{array}$

Journal entry 5: Decrease in petty cash

Date		Account Title and Explanation			Post Ref	Debit ($)	Credit ($)
July	1	Cash				200
			Petty cash				200
				Open petty cash fund.

Table -6

Cash is an asset and increased by $200. Therefore, debit Cash account with $200. Petty cash is an asset and decreased with $200. Thus, credit petty cash account with $200.