ACCT202 Notes #2 The Petty Cash Fund PDF

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Summary

1.3 The Petty Cash FundThe Imprest Petty Cash System Almost every company finds it necessary to pay small amounts for miscellaneous expenses such as taxi fares, minor office supplies, and employee's lunches. Disbursements by check for such items is often impractical, yet some control over them is im...

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1.3.2 The Petty Cash Fund The Imprest Petty Cash System Almost every company finds it necessary to pay small amounts for miscellaneous expenses such as taxi fares, minor office supplies, and employee's lunches. Disbursements by check for such items is often impractical, yet some control over them is important. A simple method of obtaining reasonable control, while adhering to the rule of disbursement by check, is the imprest system for petty cash disbursements (Kieso, et.al. 2019). Accounting for Petty Cash Fund under Imprest System: 1. The company designates a petty cash custodian, and gives the custodian a small amount of currency from which to make payments. It records transfer of funds to petty cash as:

The adjustment is to be reversed at the beginning of the next accounting period. The reversal is made in order that the normal replenishment procedures may be followed by simply debiting expenses and crediting cash in bank without distinguishing whether the expenses pertain to the current period or prior period. Under the imprest system, the petty cash custodian is responsible at all times for the amount of the fund on hand either as cash or in the form of signed receipts. These receipts provide the evidence required by the disbursing officer to issue a reimbursement check. Further, a company follows two additional procedures to obtain more complete control over the petty cash fund: 1.

2. Petty Cash fund Cash in Bank

300 300

2. The petty cash custodian obtains signed receipts from each individual to whom he or she pays cash, attaching evidence of the disbursement to the petty cash receipt. Petty cash transactions are not recorded until the fund is reimbursed (repay); someone other than the petty cash custodian records those entries. 3. When the supply of cash runs low, the custodian presents to the controller or accounts payable cashier a request for reimbursement supported by the petty cash receipts and other disbursement evidence. The custodian receives a company check to replenish (to make full or complete again) the fund. At this point, the company records transactions based on petty cash receipts.

A superior of the petty cash custodian makes surprise counts of the fund from time to time to determine that a satisfactory accounting of the fund has occurred. The company cancels or mutilates petty cash receipts after they have been submitted for reimbursement, so that they cannot be used to secure a second reimbursement.

Fluctuating Fund System Under the fluctuating fund system, the checks drawn to replenish (to make full again) the fund do not necessarily equal the petty cash disbursements. The replenishment check drawn is upon the request of the petty cash custodian. The petty cash disbursements are immediately recorded thus: 1. Establish the Fund: Petty cash fund Cash in bank

xxx xxx

2. Payment of expenses out of the petty cash fund: Supplies Expense Postage Expense Miscellaneous Expense Cash Over and Short Cash in Bank

42 53 76 2

Expenses (itemize) Petty cash fund 173

xxx xxx

3. Replenishment or increase of the fund:

4. If the company decides that the amount of cash in the petty cash fund is excessive, it lowers the fund balance as follows.

Petty cash fund Cash in bank

Cash in Bank Petty Cash Fund

The replenishment check may or may not be the same as the petty cash disbursements.

50 50

Subsequent to establishment, a company makes entries to the Petty Cash account only to increase or decrease the size of the fund. A company uses a Cash Over and Short account when the petty cash fund fails to prove out. That is, an error occurs such as incorrect change, overpayment of expense, or lost receipt. If cash proves out short (i.e., the sum of the receipts and cash in the fund is less than the imprest amount (monetary advance)), the company debits the shortage to the Cash Over and Short account. If cash proves out over, it credits the overage to Cash Over and Short. The company closes Cash Over and Short only at the end of the year. It generally shows Cash Over and Short on the income statement as an “Other expense or revenue.” 5. There are usually expense items in the fund except immediately after reimbursement. Therefore, to maintain accurate financial statements, a company must reimburse the funds at the end of each accounting period and also when nearly depleted. At the end of the accounting period, it is necessary to adjust the unreplenished expenses in order to state the correct petty cash balance: Expenses Petty Cash Fund

xxx xxx

xxx xxx

4. At the end of the accounting period, no adjustment is to be made as the petty cash expenses have already been recorded. 5. Decrease in fund: Cash in Bank Petty cash fund

xxx xxx

Illustration E7.22. McMann, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April. 1. 2.

On April 1, it established a petty cash fund in the amount of $200. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows.

Delivery charges paid on merchandise purchased Supplies purchased and used Postage expense I.O.U. from employees Miscellaneous expense

$60 25 40 17 36

The petty cash fund was replenished on April 10. The balance in the fund was $12.

3.

The petty cash fund balance was increased $100 to $300 on April 20.

Instructions: Prepare the journal entries to record transactions related to petty cash for the month of April. Solution: 1.

April 1 Petty Cash fund Cash in bank

2.

200

April 10 Inventory (Transportation-in) Supplies Expense Postage Expense Accounts Receivable—Employees Miscellaneous Expense Cash Over and Short Cash ($200 – $12)

3.

200

60 25 40 17 36 10 188

April 20 Petty Cash Cash

100 100...