Question

Kiona Co. set up a petty cash fund for payments of small amounts. The following transactions involving the petty cash fund occurred in May (the last month of the company's fiscal year).

May 1: Prepared a company check for $300 to establish the petty cash fund.
May 15: Prepared a company check to replenish the fund for the following expenditures made since May 1.

a. Paid $93.60 for janitorial services.
b. Paid $76.41 for miscellaneous expenses.
c. Paid postage expenses of $52.20.
d. Paid $68.58 to The County Gazette (the local newspaper) for an advertisement.
e. Counted $23.01 remaining in the petty cash box.

May 16: Prepared a company check for $200 to increase the fund to $500.
May 31: The petty cashier reports that $339.32 cash remains in the fund. A company check is drawn to replenish the fund for the following expenditures made since May 15.

f. Paid postage expenses of $53.73
g. Reimbursed the office manager for business mileage, $42.78.
h. Paid $44.17 to deliver merchandise to a customer, Terms FOB destination

May 31:The company decides that the May 16 increase in the fund was too large. It reduces the fund by $50, leaving a total of $450.

Required
a. Prepare journal entries to establish the fund on May 1, to replenish it on May 15 and on May 31, and to reflect any increase or decrease in the fund balance on May 16 and May 31.
b. Explain how the company's financial statements are affected if the petty cash fund is not replenished and no entry is made on May 31.

Answer 1

a. Prepare journal entries to establish the fund on May 1, to replenish it on May 15 and on May 31, and to reflect any increase or decrease in the fund balance on May 16 and May 31.

May 1, petty cash fund is established:

Dr Petty cash fund 300

Cr Cash 300

May 15, petty cash fund expenses:

Dr Janitorial services expenses 93.60

Dr Miscellaneous expenses 76.41

Dr Postage expenses 52.20

Dr Advertisement expenses 68.58

Cr Cash short and over 13.80

Cr Petty cash fund 276.99

May 15, petty cash fund is replenished

Dr Petty cash fund 276.99

Cr Cash 276.99

May 16, petty cash fund increases:

Dr Petty cash fund 200

Cr Cash 200

May 31, petty cash fund expenses:

Dr Postage expenses 53.73

Dr Travel expenses 42.78

Dr Freight expenses 44.17

Dr Cash short and over 20

Cr Petty cash fund 160.68

May 31, petty cash fund is replenished

Dr Petty cash fund 160.68

Cr Cash 160.68

May 31, petty cash fund decreases:

Dr Cash 50

Cr Petty cash fund 50

b. Explain how the company's financial statements are affected if the petty cash fund is not replenished and no entry is made on May 31.

If the petty cash fund is not replenished and the related expenses are not recorded, then the company's net income will be overstated since some expenses will not have been properly accounted for. Also, cash will be overstated in the balance sheet, as well as retained earnings.