Problem 16 - Accounting

Question

Journalize the entries to record the following: a. Check No. 2715 is issued to establish a petty cash fund of \(\$ 750\). b. The amount of cash in the petty cash fund is now \(\$ 119.57\). Check No. 3120 is issued to replenish the fund, based on the following summary of petty cash receipts: office supplies, \(\$ 415.83\); miscellaneous selling expense, \(\$ 107.90\); miscellaneous administrative expense, \(\$ 88.10\). (Since the amount of the check to replenish the fund plus the balance in the fund do not equal \(\$ 750\), record the discrepancy in the cash short and over account.)

Step-by-Step Solution

Answer

Establish the petty cash with a debit of $750. Replenish with $630.43, record expenses, and note a $18.60 cash short.

Step 1: Establish the Petty Cash Fund

To establish a petty cash fund, record the initial establishment of \( \\(750 \) by issuing Check No. 2715. Journal Entry: Debit Petty Cash: \( \\)750 \) Credit Cash (Bank): \( \$750 \).

Step 2: Calculate the Total Amount to Replenish

The total amount the petty cash fund needs to be replenished by is the difference between the initial fund and the cash remaining: Initial Petty Cash = \( \\(750 \)Cash Remaining = \( \\)119.57 \)Total to Replenish = \( \\(750 - \\)119.57 = \$630.43 \).

Step 3: Record Replenishment Expenses

Check No. 3120 is issued to replenish the fund by recording expenses listed in the receipts and identify any discrepancies. Office Supplies = \( \\(415.83 \) Misc. Selling Expense = \( \\)107.90 \) Misc. Admin Expense = \( \\(88.10 \) Total Expenses = \( \\)415.83 + \\(107.90 + \\)88.10 = \$611.83 \).

Step 4: Determine and Record Cash Short or Over

Check for discrepancies between the amount replenished and total receipts: Discrepancy = Total to Replenish \( \\(630.43 \) - Total Receipts \( \\)611.83 \) = \( \\(18.60 \).Since the Total to Replenish is more than the total receipts, you have a cash short.Debit Cash Short and Over: \( \\)18.60 \).

Step 5: Execute Journal Entry to Replenish Petty Cash

Record the journal entry for replenishing the petty cash fund:- Debit Office Supplies: \( \\(415.83 \) - Debit Misc. Selling Expense: \( \\)107.90 \) - Debit Misc. Admin Expense: \( \\(88.10 \) - Debit Cash Short and Over: \( \\)18.60 \) - Credit Cash (Bank) (Check No. 3120): \( \$630.43 \).

Key Concepts

Petty Cash Fund

A petty cash fund is a small reserve of cash kept on hand for minor expenses, often used by businesses to cover day-to-day expenditures without writing a check. It is typically established with a fixed amount and replenished periodically. Businesses use petty cash to manage minor transactions like buying office supplies or covering miscellaneous expenses.

To establish a petty cash fund, a company issues a check to set aside a specific amount, for example, $750. Journal entries are made to reflect this transaction.

• Debit: Petty Cash for $750, which increases the petty cash account.
• Credit: Cash (Bank) for $750, which decreases the bank account by the same amount.

The petty cash is thus ready to use for any small, everyday expenses that arise.

Replenishment Process

The replenishment process involves restocking the petty cash fund to its established total after some of it has been spent. This is done when the remaining cash in the fund is noticeably lower than the original amount.

To replenish, businesses calculate the amount needed to bring the fund back to its starting value. The replenishment amount equals the initial fund minus the remaining cash. For instance, if \(119.57 remains from an original \)750 fund, the replenishment amount is:

Initial Fund - Remaining Cash = Replenishment Amount

That is, \[750 - 119.57 = 630.43\] dollars needs to be replenished.

The company then issues a check for this amount, debiting various expense accounts to account for the spent cash and credits the cash to the bank.

• Expenses like office supplies and miscellaneous costs are documented with receipts and debited individually.
• The replenishment check reflects the total of these debited expenses as a credit.

This systematic replenishment of petty cash ensures accurate tracking of small expenditures and maintains the fund's availability for future use.

Cash Short and Over Account

The cash short and over account is used to record discrepancies between the actual cash spent and the receipts tracking how it was spent. These discrepancies occur if the closing cash balance plus receipts do not total back to the original amount set in petty cash.

For instance, if the total amount to replenish the petty cash (\(630.43) is more than the sum of all receipt totals (\)611.83), there is a discrepancy of \[630.43 - 611.83 = 18.60\]This indicates a cash shortfall, typically due to unaccounted expenses or minor errors in accounting.

In accounting terms:

• Debit: Cash Short and Over $18.60 when the fund is short.
• Otherwise, Credit: Cash Short and Over if surplus exists.

This account plays an important role in ensuring the business accounts for all funds correctly, identifying errors, and monitoring the handling of petty cash.