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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 fundโ€™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 fundโ€™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

Preparing a bank reconciliation and journal entries

This problem continues the Canyon Canoe Company situation from Chapter 6.

Canyon Canoe Company has decided to open a new checking account at River

Nations Bank during March 2019. Canyon Canoe Companyโ€™s March Cash T-account

for the new cash account from its general ledger is as follows:

Cashโ€”River Nations Bank Checking Account

Balance

Deposit

Deposit

Deposit

Deposit

200

4,300

750

1,675

1,500

14,165

Mar. 1

2

13

20

27

Deposit

10,000

2,325

2,750

4,500

31 3,490

Mar. 2

4

9

14

21

Ck#101

Ck#102

Ck#103

Ck#104

Ck#105

175

300

28

30

Ck#106

Ck#107

Balance

Canyon Canoe Companyโ€™s bank statement dated March 31, 2019, follows:

Beginning Balance, March 1, 2019

Deposits and other credits:

Mar. 2

14

21

28

29 EFT Sport Shirts(1)

(1) Sport Shirts is a customer making a payment on account.

(2) Bank Checks is a company that prints business checks (considered

a bank expense) for Canyon Canoe Company

\(10,000

2,325

2,750

4,500

500

Checks and other debits:

Mar. 2 EFT to Bank Checks(2)

Ending balance, March 31, 2019

\) 0

31 Interest Revenue 45

3 Ck#101

6 Ck#102

15 Ck#104

16 Ck#103

55

200

4,300

1,675

750

28 EFT to Rivers Energy(3) 270

29 Ck#106 175

31 Bank service charge 70

20,120

(7,495)

$ 12,625

(3) Rivers Energy is a utility provider.

Requirements

1. Prepare the bank reconciliation at March 31, 2019.

2. Journalize any transactions required from the bank reconciliation.

3. Compute the adjusted account balance for the Cash T-account, and denote thebalance as End. Bal. Does the adjusted balance of the Cash T-account match theadjusted book balance on the bank reconciliation?

Match the accounting terminology to the definitions.

1. Sarbanes-Oxley Act

2. Internal control

3. Encryption

4. Separation of duties

5. Internal auditors

a. Organizational plan and all the related measures adopted by an entity to safeguard assets,

encourage employees to follow company policies, promote operational efficiency, and ensure

accurate and reliable accounting records.

b. Employees of the business who ensure that the companyโ€™s employees are following company

policies and meeting legal requirements and that operations are running efficiently.

c. Rearranging plain-text messages by a mathematical processโ€”the primary method of

achieving security in e-commerce.

d. Requires companies to review internal control and take responsibility for the accuracy and

completeness of their financial reports.

e. Dividing responsibilities between two or more people.

Accounting for petty cash transactions

Suppose that on June 1, Rockinโ€™ Gyrations, a disc jockey service, creates a petty cash

fund with an imprest balance of \(300. During June, Michael Martell, fund custodian,

signs the following petty cash tickets:

Petty Cash

Ticket Number Item Amount

1 Postage for package received \) 30

2 Office party 25

3 Two boxes of stationery 20

4 Printer cartridges 15

5 Business dinner 65

On June 30, prior to replenishment, the fund contains these tickets plus cash of \(140.

The accounts affected by petty cash payments are Office Supplies, Entertainment

Expense, and Postage Expense.

Requirements

1. On June 30, how much cash should this petty cash fund hold before it is replenished?

2. Journalize all required entries to (a) create the fund and (b) replenish it. Includeexplanations.

3. Make the entry on July 1 to increase the fund balance to \)325. Include an explanation

Preparing a bank reconciliation and journal entries

The October 31 bank statement of Wyndhamโ€™s Healthcare has just arrived from State

Bank. To prepare the bank reconciliation, you gather the following data:

a. The October 31 bank balance is \(6,290.

b. The bank statement includes two charges for NSF checks from customers. One is

for \)370 (#1), and the other is for \(180 (#2).

c. The following Wyndhamโ€™s checks are outstanding at October 31:

Check No. Amount

237 \) 120

288 140

291 570

294 570

295 30

296 110

d. Wyndhamโ€™s collects from a few customers by EFT. The October bank statement

lists a \(2,200 EFT deposit for a collection on account.

e. The bank statement includes two special deposits that Wyndhamโ€™s hasnโ€™t recorded

yet: \)900 for dividend revenue and \(100 for the interest revenue Wyndhamโ€™s

earned on its bank balance during October.

f. The bank statement lists a \)80 subtraction for the bank service charge.

g. On October 31, the Wyndhamโ€™s treasurer deposited \(270, but this deposit does

does not appear on the bank statement.

h. The bank statement includes a \)750 deduction for a check drawn by Multi-State

Freight Company. Wyndhamโ€™s notified the bank of this bank error.

i. Wyndhamโ€™s Cash account shows a balance of $3,200 on October 31.

Requirements

1. Prepare the bank reconciliation for Wyndhamโ€™s Healthcare at October 31, 2018.

2. Journalize any required entries from the bank reconciliation. Include an explanation for each entry.

Question: What is the difference between an internal auditor and an external auditor?

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