Question

1. A petty cash fund of $175 was established on April 1. Year 1. 2. Employees were reimbursed when they presented petty cash vouchers to the petty cash custodian. 3. On April 30, Year 1, the petty cash fund contained vouchers totaling $152.78 plus $23.12 of currency. Required Answer the following questions: a. How did the establishment of the petty cash fund affect (increase, decrease, or have no effect on) total assets? Increase Decrease No effect b. What is the amount of total petty cash expenses to be recognized during April? (Round your answer to 2 decimal places.) Net charge to expense c. When are petty cash expenses recognized (at the time of establishment, reimbursement, or replenishment)? Establishment Reimbursement

Answer 1

Answer :

a) No effect

The initial petty cash journal entry(at the time of establishment of petty cash fund) is a debit to the petty cash account and a credit to the cash account. One asset is getting debited and other is getting credited. Therefore, there will be no effect in net.

b) Petty cash expense to be recognized during April : $152.78

Vouchers totaling $152.78 is the total petty cash expenses to be recognized during April.

c) Establishment

Some explanations related to the concepts involved:

Petty cash is a small amount of currency and coins that a company has available to make very small payments instead of requesting and processing a company check. The amount of the petty cash fund is recorded in a current asset account entitled Petty Cash when the petty cash fund is established.

Recording Petty Cash

When a petty cash fund is in use, petty cash transactions are still recorded on financial statements. No accounting journal entries are made when purchases are made using petty cash, it’s only when the custodian needs more cash and in exchange for the receipts, receives new funds that the journal entries are recorded. The journal entry for giving the custodian more cash is a debit to the petty cash fund and a credit to cash.

If there's a shortage or overage, a journal line entry is recorded to an over/short account. If the petty cash fund is over, a credit is entered to represent a gain. If the petty cash fund is short, a debit is entered to represent a loss. The over or short account is used to force-balance the fund upon reconciliation.