Question

I need to understand the following question please.

PETTY CASH JOURNAL ENTRIES: Based upon the following petty cash information, prepare (a) the journal entry to establish a petty cash fund, (b) the journal entry to replenish the petty cash fund and (c) the journal entry to change the petty cash fund.

On January 1, 2013 a check was written in the amount of $300 to establish a petty cash fund. During the month, the petty cash fund was used to pay several items listed below and on January 31, 2013 the remaining amount in the petty cash fund was $68.00. After replenishing the fund, it was decided to increase the fund from $300 to $400.

Receipts in Petty Cash Fund on January 31, 2013:

            Office Depot (Supplies)                                      $ 21.00

            Chevron (Gas for company vehicle)                         40.00

            Alberto’s (Owner’s personal lunch)                         15.00

            USPS (postage)                                                     85.00

            United Way (Donation)                                          20.00

            Killer Pizza from Mars (Staff Meeting)                    47.00

Answer 1

Petty cash refers to a fund established for the sole purpose of meeting petty expenses i.e. to meet day-to-day expenses which require immediate cash payouts. Also known as imprest cash, the impact of the fund is immaterial in the financial statements.

The way petty cash works is that the cashier earmarks a specified sum for petty expenses (known as fund), makes payments out of it and restores the minimum required balance at the end of specified intervals.

The journal entries for the given trasnactions are as under:

Date	Particulars	Debit ($)	Credit ($)
	Establishing fund
1/1/2013	Petty cash	300
	To Cash		300
1/xx/2013	Replenishing the fund
	Supplies	21
	Gas for vehicle	40
	Lunch expenses	15
	Postage	85
	Donation	20
	Meeting expenses	47
	Other expenses (Note)	4
	To Petty Cash		232
1/31/2013	Petty Cash	232
	To Cash		232
1/31/2013	Changing fund
	Petty Cash	100
	To Cash		100

Note: The question specifies that the balance in the petty cash account at Jan 31 is $68. In the given case, the specified expenses amounted to $228, which leaves the petty cash with $72. Hence, to bring the balance to $68, an additional $4 has been recorded as other expenses in order to bring the balance down to $68.

In case of any questions on the above solution, kindly share the same in the comments section.

All the best!