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Accounting for petty cash transactions

On June 1, Fab Salad Dressings creates a petty cash fund with an imprest balance of

\(300. During June, Al Franklin, the fund custodian, signs the following petty cash tickets:

Petty Cash

Ticket Number Item Amount

101 Office supplies \) 30

102 Cab fare for executive 20

103 Delivery of package across town 50

104 Business dinner 40

105 Merchandise inventory 90

On June 30, before replenishment, the fund contains these tickets plus cash of \(90.

The accounts affected by petty cash payments are Office Supplies, Travel Expense,

Delivery Expense, Entertainment Expense, and Merchandise Inventory.

Requirements

1. Explain the characteristics and the internal control features of an imprest fund.

2. On June 30, how much cash should the petty cash fund hold before it isreplenished?

3. Journalize all required entries to create the fund and replenish it. Includeexplanations.

4. Make the July 1 entry to increase the fund balance to \)375. Include an explanationand briefly describe what the custodian does.

Short Answer

Expert verified

The cash account is credited with $210 in the replenishment of the petty cash fund.

Step by step solution

01

Definition of the petty cash fund

A petty cash fund is a fund that is created to meet small expenses.

02

Features and characteristics of an imprest fund

Feature of an imprest fund:

  1. Imprest fund is a small cash fund used to pay incidental expenses.
  2. The balance of the imprest fund is stored in the box or drawer.
  3. When the expense payment is made, the fund’s cash is replaced with an expense voucher.

Characteristics of an imprest fund:

  1. The Imprest fund contains the same balance at all times. The balance of the imprest cannot be changed unless the amount allotted to the petty cash fund changes. During the transaction, the cash account is credited, and the balance of the imprest fund is not changed.
  2. During the payment of the incidental expense, the cash fund is replaced with the expense invoice. Due to this, the fund balance is equal to the tickets.
  3. As you know, the fund’s balance cannot change unless the limit of the fund changes. The custodian has the information on the amount available in the fund for expenditures. This will help in fixing the responsibility,
03

Cash petty cash fund should hold

Fund Balance

$300

Less:

Office Supplies

$30

Delivery Expenses

$50

Cab fare

$20

Business Dinner

$40

Merchandise Inventory

$90

Petty cash balance before replenishment

$70

Hence, the petty cash fund holds $70 before the replenishment.

04

Journal entries

Date

Particulars

Debit

Credit

June 1

Petty Cash Fund

$300

Cash

$300

(Journal entry for the creation of petty cash fund)

June 30

Office Supplies

$30

Delivery Expenses

$50

Cab fare

$20

Business Dinner

$40

Merchandise Inventory

$90

Cash Short & Over

$20

Cash

$210

(Being journal entry for replenishing petty cash fund)

The first entry is passed for the creation of the petty cash fund.

In the second journal entry, the entry of the replenishment is passed in which the cash short& over the account is credited with $20 and the cash account credited with $210.

05

Balance in the petty cash fund increased

Date

Particulars

Debit

Credit

July 1

Petty Cash Fund

$375

Cash

$375

(Journal entry for the creation of petty cash fund)

The entry is passed to increase the balance of his petty cash fund.

A custodian is a person who keeps the receipt of expenses and presents these receipts to the supervisor. The following process is followed by the custodian to prove the accuracy of the petty cash fund.

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Most popular questions from this chapter

Levon Helm was a kind of one-person mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything

Requirements

  1. What was the key control weakness in this case?
  2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?

How do businesses control cash receipts over the counter?

Evaluating internal control over cash payments Gary’s Great Cars purchases high-performance auto parts from a Nebraska vendor. Dave Simon, the accountant for Gary’s, verifies receipt of merchandise and then prepares, signs, and mails the check to the vendor.

Requirements

1. Identify the internal control weakness over cash payments.

2. What could the business do to correct the weakness?

Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.

a. Top managers delegate all internal control procedures to the accounting department.

b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.

c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.

d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.

Requirements

1. Define internalcontrol.

2. The system of internal control must be tested by external auditors. What law or rule requires this testing?

3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.

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