Concept explainers
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:
- 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.
- 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. - 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.
- 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 of the petty cash fund
Explanation of Solution
The Journal entry for the establishment of the petty cash fund is as follows:
| Blues Music Center | |||
| Petty Cash Fund | |||
| Journal Entries | |||
| Date | Accounts titles and Explanation | Debit | Credit |
| Mar. 5 | Petty cash | $ 250.00 | |
| Cash | $ 250.00 | ||
| (Being Petty cash fund established) | |||
Requirement-2:
To prepare:
The Petty Cash payments report for the month of March
Requirement-2:
Explanation of Solution
The Petty Cash payments report for the month of March is as follows:
| Blues Music Center | |||
| Petty Cash Payments Report | |||
| For the month of March | |||
| Reconciliation | Replenish Amount | ||
| Fund Total (A) | $ 250.00 | ||
| Payments:
| |||
| Office Supplies Expenses (14.13+11.65+20.54) | $ 46.32 | ||
| Merchandise Inventory (12.5+45.10) | $ 57.60 | ||
| Delivery Expenses | $ 10.75 | ||
| Mileage Expenses | $ 56.80 | ||
| Postage Expenses | $ 18.00 | ||
| Total Payments (B) | $189.47 | $ 189.47 | |
| Recorded Amount on Hand (C) =A-B = | $ 60.53 | ||
| Actual Amount on Hand (D) | $ 61.53 | ||
| Cash Short/Over (E) = (C-D) | $(1.00) | $ (1.00) | |
| Amount to replenish = C+E= | $ 188.47 | ||
Requirement-3(a):
To prepare:
The journal entry for the replenishment of the petty cash fund
Requirement-3(a):
Explanation of Solution
The journal entry for the replenishment of the petty cash fund is as follows:
| Blues Music Center | |||
| Petty Cash Fund | |||
| Journal Entries | |||
| Date | Accounts titles and Explanation | Debit | Credit |
| Mar. 31 | Office Supplies Expenses (14.13+11.65+20.54) | $ 46.32 | |
| Merchandise Inventory (12.5+45.10) | $ 57.60 | ||
| Delivery Expenses | $ 10.75 | ||
| Mileage Expenses | $ 56.80 | ||
| Postage Expenses | $ 18.00 | ||
| Cash Short/Over (Balancing Figure) | $ 1.00 | ||
| Cash (250-61.53) | $ 188.47 | ||
| (Being Petty cash fund replenished) | |||
Requirement-3(b):
To prepare:
The journal entry for the increase in the petty cash fund
Requirement-3(b):
Explanation of Solution
The journal entry for the increase in the petty cash fund is as follows:
| Blues Music Center | |||
| Petty Cash Fund | |||
| Journal Entries | |||
| Date | Accounts titles and Explanation | Debit | Credit |
| Mar. 31 | Petty cash | $ 50.00 | |
| Cash | $ 50.00 | ||
| (Being Petty cash fund raised) | |||
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Chapter 8 Solutions
Fundamental Accounting Principles
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