Chapter 6, Problem 3PSA

To determine

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

The rules for journal entry are defined by 5 accounting components,

• Assets: Increase in asset should be debit and decrease should be credit.
• Liabilities: Increase in liabilities should be credit and decrease should be debit.
• Equity: Increase in Equity should be credit and decrease should be debit.
• Expense: Increase in expense should be debit and decrease should be credit.
• Revenue: Increase in revenue should be credit and decrease should be debit.

Petty Cash System:

Petty cash system is a system which is used for making payments for small day to day expenses. It facilitates ease to deal with small cash disbursements.

1.

To prepare: Journal entries in the books of N Gallery during the month of February.

Explanation of Solution

To establish the petty cash fund.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 1	Petty Cash		400
	Cash			400
	(To establish petty cash fund)

• Petty cash is an asset account, when it increases it gets debited. Here, cash is added to petty cash so; petty cash account is increased and debited by $400.
• Cash is also an asset account. Cash has gone out of the bank so it is decreased. Hence, cash account credited by $400.

2.

To determine

To prepare: Petty cash payments report for February.

Explanation of Solution

Petty cash payment report contains all payments made out of the petty cash fund.

Petty cash report is shown below for the month of February:

N Gallery
Petty Cash Payment Report (for February)
Date	Particulars	Amount ($)	Amount ($)
	Delivery expenses
Feb. 23	Delivery of customer’s merchandise		20
	Mileage expenses
Feb. 14	Reimbursement for mileage		68
	Postage expenses
Feb. 12	Express delivery of contract	7.95
Feb. 27	Purchased postage stamps	54	61.95
	Merchandise inventory ( transportation-in)
Feb. 9	COD charges on purchases	32.50
Feb. 25	COD charges on purchases	13.10	45.60
	Office supplies expenses
Feb. 5	Purchased paper for copier	14.15
Feb. 20	Purchased stationery	67.77	81.92
	Total		277.47

Thus, total expenses ascertained are $277.47 .

3.

To determine

To Prepare: Journal entries in the books of N Gallery for part 2 to (a) reimburse and (b) increase the fund amount.

Explanation of Solution

(a)

Journal entry to reimburse

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Feb 28	Delivery expenses		20
	Mileage expenses		68
	Postage expenses		61.95
	Merchandise inventory		45.6
	Office supplies expenses		81.92
	Cash over and short		2.11
	Cash			279.58
	(To reimburse the petty cash fund )

• All expenses have debit balance. Expenses increase and get debited. So, given in the question delivery, Mileage, postage, merchandise inventory and office supplies expenses $20, $68, $61.95, $45.6 and $81.92 respectively are debited.
• $120.42 is in the cash box out of total petty cash fund $400. This implies $279.58 ($400-$120.42) should have spent. Since actual expenses are $277.47and cash available to spend is $279.58, difference of this $2.11 is debited to the ‘Cash over and short’ account.
• Cash is an asset account. Cash has paid out of the bank so it is decreased. Hence, cash is credited with $279.58.

(b)

Journal entry to increase the fund amount

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Feb 28	Petty Cash		100
	Cash			100
	(To increase petty cash fund to $500)

• Petty cash is an asset. When it increases it gets debited. So, here petty cash increases by $100. Thus petty cash account gets debited.
• Cash is also an asset. When it decreases it gets credited. So, here cash decreases. Thus cash account gets credited.