Chapter 8, Problem 2PSA

To determine

Concept Introduction:

Petty Cash Accounting:

Petty Cash is a small amount of cash kept for disbursing small expenses like postage, miscellaneous expenses etc. in this system an amount of cash is given to a custodian as advance to disburse for expenses. The custodian disburses the expenses and asks for replenishment or raising the fund time to time. The following transactions are incurred in case of petty cash system:

1. Establishment of the petty cash fund:

   Petty cash is created by drawing amount of cash from business as a separate account. To journalize this transaction, the Petty cash account is debited and Cash account is credited with the initial amount of petty cash fund.

2. Disbursements from the petty cash fund:

   The custodian disburses the find for payment of small expenses. Each disbursement is not recorded separately; rather a combined journal entry is passed at the time of replenishment of the fund.

3. Replenishment for the petty cash fund:

   The fund is replenished with the amount of cash spent to bring the find balance same as the initial fund.

4. Increase or Decrease of fund amount:

   Petty Cash fund amount may be increased or decreased as per the requirements. To increase the fund, the Petty cash account is debited and Cash account is credited. To Decrease the fund, Cash account is debited and Petty cash account.

Requirement-1:

To prepare:

The Journal entries for the establishment and replenishment or rising of the fund

Requirement-2:

To determine

To Explain:

The effect on financial statements, if no entry is made for the replenishment of the petty cash fund on May 31