Apr. 1 Received a company cheque for $300 to establish the petty cash fund — Capital Irrigation has only General Journal its accounting system and uses record

Capital Irrigation has only a General Journal in its accounting system and uses it to record all transactions. However, the company recently set up a petty cash fund to facilitate payments of small items. The following petty cash transactions were noted by the petty cashier as occurring during April 2014:

Apr. 1 Received a company cheque for $300 to establish the petty cash fund.

15 Received a company cheque to replenish the fund for the following expenditures made since April 1 and to increase the fund to $400.

a. Paid $82 for janitorial service.

b. Purchased office supplies for $78.15.

c. Purchased postage stamps for $25.00.

d. Paid $92.50 to The County Crier for an advertisement in the newspaper.

e. Discovered that $24.35 remained in the petty cash box.

30 The petty cashier noted that $244.95 remained in the fund and decided that the April 15 increase in the fund was too large. Therefore, a company cheque was issued to replenish the fund for the following expenditures made since April 15 and to reduce the fund to $350.

f. Purchased office supplies for $94.65.

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g. Reimbursed office manager for business auto, $45.60.

h. Paid $14.80 courier charges to deliver merchandise to a customer.

Required

Prepare journal entries to record the establishment of the fund on April 1 and its replenishments on April 15 and April 30.

Analysis Component:

Explain how the company's financial statements would be affected if the petty cash fund were not replenished and no entry were made on April 30.

SOLUTION

2014	2014
Apr.	1	Petty Cash..............................................................	300.00
		Cash................................................................	300.00
		To establish fund.
	15	Advertising Expense.............................................	92.50
		Janitorial Expense.................................................	82.00
		Postage Expense...................................................	25.00
		Office Supplies Expense*......................................	78.15
		Petty Cash..............................................................	100.00
		Cash Over and Short.....................................	2.00
		Cash................................................................	375.65
		To reimburse fund and increase it by $100.
	30	Delivery Expense...................................................	14.80
		Auto Expense.........................................................	45.60
		Office Supplies Expense*......................................	94.65
		Petty Cash.......................................................	50.00
		Cash................................................................	105.05
		To reimburse fund and decrease it by $50.

Analysis component

If the April 30 replenishment is not made and no entry is recorded, several expenses would not be recognized and net income and equity would be overstated by $155.05 ($14.80 + $45.60 + $94.65). Similarly, the petty cash asset and total assets would be overstated by $155.05.

Even if the April 30 entry shows a debit to Office Supplies instead of Office Supplies Expense, the expense would turn out to be understated without this entry. This result occurs because the expense equals the difference between the unadjusted Office Supplies account balance and the count of office supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supplies expense will be understated.