Answer:
a. Prepare journal entries to establish the fund on May 1, to replenish it on May 15 and on May 31, and to reflect any increase or decrease in the fund balance on May 16 and May 31.
May 1, petty cash fund is established:
Dr Petty cash fund 300
Cr Cash 300
May 15, petty cash fund expenses:
Dr Janitorial services expenses 93.60
Dr Miscellaneous expenses 76.41
Dr Postage expenses 52.20
Dr Advertisement expenses 68.58
Cr Cash short and over 13.80
Cr Petty cash fund 276.99
May 15, petty cash fund is replenished
Dr Petty cash fund 276.99
Cr Cash 276.99
May 16, petty cash fund increases:
Dr Petty cash fund 200
Cr Cash 200
May 31, petty cash fund expenses:
Dr Postage expenses 53.73
Dr Travel expenses 42.78
Dr Freight expenses 44.17
Dr Cash short and over 20
Cr Petty cash fund 160.68
May 31, petty cash fund is replenished
Dr Petty cash fund 160.68
Cr Cash 160.68
May 31, petty cash fund decreases:
Dr Cash 50
Cr Petty cash fund 50
b. Explain how the company's financial statements are affected if the petty cash fund is not replenished and no entry is made on May 31.
If the petty cash fund is not replenished and the related expenses are not recorded, then the company's net income will be overstated since some expenses will not have been properly accounted for. Also, cash will be overstated in the balance sheet, as well as retained earnings.
