Concept explainers
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 $400.
2.
To prepare: Petty cash payments report for February.
2.
Explanation of Solution
Petty cash payment report contains all payments made out of the petty cash fund.
Petty cash report is shown below for the month of February:
N Gallery | |||
Petty Cash Payment Report (for February) | |||
Date | Particulars | Amount ($) | 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 $277.47 .
3.
To Prepare: Journal entries in the books of N Gallery for part 2 to (a) reimburse and (b) increase the fund amount.
3.
Explanation of Solution
(a)
Journal entry to reimburse
Date | Account Title and Explanation | Post ref | Debit($) | 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.
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Chapter 6 Solutions
FINANCIAL ACCT.FUND.(LOOSELEAF)
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