Chapter 6, Problem 1MCQ

To determine

Petty Cash System:

Petty cash system is a management of small cash transactions where payment of petty expenses is made out of it. It contains fixed balance which is maintained on monthly basis by the cashier.

Journal Entries:

Entries passed to record all the financial transactions in chronological manner are known as journal entries.

The rules to pass journal entries are,

• Debit what comes in credit what goes out.
• Debit all income, gains and credit all expenses, losses.
• Debit the receiver and credit the giver.

To prepare: Journal entries to replenish petty cash fund.

Explanation of Solution

e.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Expenses		420
	Cash over and short		5
	Cash			425
	(To replenish petty cash)

Table(1)

• All expenses have debit balance. Expenses increase and get debited. So, expense account debited with $420.
• $75 is in the cash box out of total petty cash fund $500. This implies $425 ($500-$75) should have spent. Since actual expenses are $420 and spent $425, difference of this $5 is debited to the ‘Cash over and short’ account.
• Cash is an asset account. Cash has gone out of the bank so it is decreased. Hence, cash is credited with $425.

Hence, correct option is e.

1. 
   

   A debit to cash for $75 is not appropriate since cash has gone out of the bank and not received so; cash account is credited with $ 425 instead of debiting $75.

2. 
   

   Total of cash $425 has gone thus cash account should be credited with $425 instead of $75.

3. 
   

   Expenses are debited with $420 due to their payment out of petty cash. Thus credit to petty cash for $420 is inappropriate.

4. 
   

   Cash over and short account is debited with $5 instead of credited due to few less payment of expenses with $5.