Question

Part I (1) What is petty cash and what purpose(s) does it serve? From a journal entry standpoint, how is petty cash set up and how is it replenished? (2) What types of controls should be in place to make sure people in the office don't just take from petty cash (for their own personal use) whenever they feel like it? In your opinion, what is an appropriate amount to have in petty cash? Part II (1) What is the difference between an account receivable and a note receivable? (2) What is the formula for calculating interest on a note receivable? (3) Please calculate the interest on a $10,000, 120-day, 12 percent note. Once you have determined the interest amount, briefly explain what it means. When does the interest get recorded?

Answer 1

Petty Cash is basically the small amount of cash kept handy by company for meeting small day to day requirements such as small postage expenses or snacks for employees etc.Petty Cash is kept handy by the Petty Cahsier who is the custodian of fixed amount of cash provided to him at the start of the month to use it throughtout the month for petty expenses.

At the end of month the petty cashier gives the statment of the cash spent on petty expenses and again provided with the amount of cash spent to maintain the cash balance for next month.

Journal entries for Petty Cash Expenses :

1.Petty Cash A/c Dr.

To Cash A/c

(for cash given for petty cash expenses)

2.Expense a/c Dr.

To Petty Cash a/c

(for expenses paid out of petty cash)

Petty cash removes away the need of signing a chequq and issuing it for every smallest nature of expense happening in the company thus making the signatories free looking and giving time on more important business decisions.

Petty Cash expenses and petty cash can be controlled by auditing at regular intervals all the recipts and bills for each expense incurred and tallying it with the statment of expenses given by the petty cashier.A chcek will be kept so that he might not misuse the petty cash.After examination of all the bills and statement of expenses the petty cashier is reimbursed the cash spent for the next month balance.This way no one can use petty cash for their personal use.

$50 to $200 is sufficient for petty cash expenses and considered appropriate for most of small business concerns.However the larger concerns can maintain $500 of petty cash for petty expenses.

Difference between Accounts recievable and notes recievable

Accounts Recivable and notes recivable both are disclosed as cuurent assets on balance sheet but accounts recivable is basically the amount of debts due to company from its debtors/customers for credit sales.It is generally recovered within a shorter span of time,a fixed credit period of 30,60 or 90 days.

But Notes recivable is a debt with which promisory notes are attached and are recovered from customers over a longer period of 12 months.If they goes beyong 12 months then they become long term liabilities.A written promisory notes gives the holder right to reciev the amount mentioned in promisory note.

Usually business allows customers to convert their accounts recivable into promisory notes.

Let say a promisory note of $5000 at 10% is for 60 days

Formula would be :$5000*10%*60/365 =$82 interest for 60 days

Formula is Amount * Interest rate*no. of days/365

Interest on promisory note of $10000,120 days ,12 % is $10000*12%*120/365 =$395

The interest of $395 will be paid along with $10000 within 120 days of term mentioned in promisory note.

Interest gets recorded in the books as and when it gets due to company on accrual basis.

Journal entry

Interest on Notes Recivable A/c Dr.

To Interest income A/c

(for interest due and accrued)