petty cash book - university of lusaka · the petty cash book lists all cash payments for small ......

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PETTY CASH BOOK

The petty cash book lists all cash payments for small items, and occasional small receipts.

Most businesses keep a small amount of cash on the premises to make occasional small payments in cash – eg to pay the milkman, to buy a few postage stamps etc.

This is often called the cash float or petty cash account.

Petty cash can also be used for occasional small receipts, such as cash paid by a visitor to make a phone call or to take some photocopies.

There are usually more payments than receipts and petty cash must be 'topped up' with cash from the business bank account.

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ADVANTAGES OF PETTY CASH BOOKa) The task of handling and recording small cash

payments can be given by the cashier to a junior member of staff.

• This person is known as the petty cashier

b) If small cash payments were entered into the main cash book, these items would then need posting one by one to the ledgers.

• However if a petty cash book is used , it would only be monthly totals for each period that need posting to the general ledger.

• When a petty cashier makes a payment to someone than that person will have to fill in a voucher showing exactly what the payment was for , they usually have to attach bills.

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THE IMPREST SYSTEM Under what is called the imprest system, the amount

of money in petty cash is kept at an agreed sum or

'float' (say K500).

Expense items are recorded on vouchers as they

occur.

The imprest system is one where the cashier gives the

petty cashier enough to meet the petty cash needs for

the following period.

In other words the cashier tops up the amount

remaining in petty cash to bring it back up to the level it

was at when the period started.

This process is the imprest system and this topped up

amount is known as the petty cash float.

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THE IMPREST SYSTEM For example

Period 1 K

The cashier gives the petty cashier 500

The petty cashier pays out in the period 420

Petty cash now in hand 80

The cashier now gives the petty cashier 420

Petty cash in hand at the end of period one 500

Period 2

Petty cashier pays out in the period 450

Petty cash now in hand 50

The cashier now gives the petty cashier 450

Patty cash in hand at the end of period 2 500

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EXAMPLE PETTY CASH BOOK

Record the following transactions in the petty cash book of a Nursery School:

a) 1 September 2015 the head teacher gives K3,000 as a float to the petty cashier out of petty cash during September.

b) 2 September bought petrol for the school bus Voucher No. 1 amounting to K160

c) J.Bwalya – travelling expenses K230 Vouched NO. 2.

d) Paid for postage K120 Voucher No. 3.

e) D.Mulenga staff travelling expenses K320.

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EXAMPLE PETTY CASH BOOKf) Paid cleaning expenses on 7 September 2015

amounting to K110 voucher number 5.

g) 9 September bought Petrol K210 for the school

bus voucher No. 6.

h) 12 September paid staff travelling expenses to

C.Katongo for K210 voucher No.7.

i) 14 September Paid for School bus petrol K130

Voucher No.8.

j) 15 September 2015 Paid staff travelling expenses

J.Bwalya K230 voucher No.9.

k) 16 September paid cleaning expenses K50

voucher no.15.

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EXAMPLE PETTY CASH BOOKl) 18 September Paid petrol for school bus K110

voucher No.11.

m) 20 September paid postage K120 voucher no.12.

n) 22 September paid cleaning expenses K110

vouched no.13.

o) 24 September Paid C.Katongo K70 for staff

travelling expenses voucher no.14.

p) 27 September Settlement of C.Brown ‘s account in

the purchases ledger K130 voucher no.15

q) 29 September paid postage K120 vouched no16.

r) 30 The head teacher reimburses the petty cashier

the amount spent in the month

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EXAMPLE PETTY CASH BOOK

All expenses and income listed above are exclusive

of Value Added Tax.

Required:

Record all the transactions in petty cash book and

balance off as at 30 September 2015 and restore the

Imprest float.

[Total: 15 marks]

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THE GENERAL JOURNAL

The other items which do not pass through

these five other books are much less common

and sometimes much more complicated.

These transactions are entered in the General

journal commonly known as the Journal.

For each transaction the following entries are

required in the general journal:

a) The date

b) The name of the account (s) to be debited and

the amount (s).

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THE GENERAL JOURNAL

c) The name of the account (s) to be credited and

the amount(s).

d) A description and explanation of the

transaction (this is called the narrative).

e) The folio.

f) The details column.

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FORMAT THE GENERAL JOURNAL

THE JOURNAL

Date Details Folio DR CR

The name of the account to be

debited

The name of the account to

be cerdited

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TYPICAL USES OF THE JOURNAL

Some of the main uses of the journal are listed

below.

1. The purchase and sale of fixed assets on credit.

2. Writing off bad debts.

3. The correction of errors in the ledger accounts.

4. Opening entries to open up new sets of books.

5. Adjustments to any of the entries in the ledger.

• The list is not exhaustive but is only a guide.

• There is an indent before the credit entry to make

it obvious it is a credit part of the double entry.

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THE PURCHASE AND SALE ON CREDIT OF

FIXED ASSETS

A milling machine is bought on credit from Tool

makers Ltd for K10,550 on 1 July 2014.

The effect of the transaction is to increase an

assets and reduced a liability.

The journal can be prepared as follows before

posting to the ledger :

14

THE PURCHASE AND SALE ON CREDIT OF FIXED ASSETS

A sale of machinery no longer required

for K3,000 on credit to K .Lamb on 2 July

2014.

Prepare a journal clearly showing the

narrative and accounts affected and post

to the ledger.

15

WRITING OFF BAD DEBTS

A debt of K78,000 owing owing to us from H

.Mander is written off as a bad debt on 31 August

2014.

Required prepare the journal entry and post to the

ledger.

16

OPENING ENTRIES FOR A BUSINESS

J . Brew after being in business for some years

without keeping proper records ,now decides to keep

a double entry set of books.

On 1 July 2014 he establishes that his assets and

liabilities are as follows:

Assets : Van K37,000 ,Fixtures K18,000 , Stock

K4,200 ,Debtors – B .Young K9,500 , D.Blake K4,500 ,

Bank K8,600 , Cash K6,500.

Liabilities : Creditors – M .Quinn K12,900 , C.Walters

K4,100.

Required prepare a Journal and post to the respective

accounts?

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ADJUSTMENTS TO ANY OF THE ENTRIES IN

THE LEDGER

These can be of many types and it is impossible

to write out a complete list.

Several examples are shown below :

Example 1:

K .Young a debtor owed K20,000 on 1 July

2014. He was unable to pay his account in cash

,but offers a five year car in full settlement of the

debt. The offer is accepted on 5 July 2014.

Prepare the Journal and post to the relevant

accounts.

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ADJUSTMENTS TO ANY OF THE ENTRIES IN THE

LEDGER

Example 2:

T.Jones is a creditor .On 10 July 2014 his business

is taken over by A .Lee to whom the debt of

K15,000 is now to be paid.

Prepare a Journal and post to the relevant

accounts.

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ADJUSTMENTS TO ANY OF THE ENTRIES IN THE

LEDGER

Example 3 : We had not yet paid for a printer we

bought on credit for K3,100 because it was not

working properly when installed. On 12 July

2014 we returned it to the supplier ,R.S. Ltd. An

allowance of K3,100 was offered by the supplier

and accepted.

Prepare the journal entry and post to the

necessary accounts.

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THE TRIAL BALANCE AND ERRORS

Just because a trial balance is balancing does

not mean that all the entries in the accounts

are accurate.

It just means that certain type of errors have

not been made such as forgetting to enter the

credit side of a transaction.

There are several types of errors that do not

affect the balancing of the trial balance.

Below is a list of errors that are not revealed

by the trial balance.

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ERRORS NOT REVEALED

a) Errors of omission:

• If both the debit and the credit entries for a

transaction have been omitted, the trial balance

will not be affected and will not therefore reveal

the error.

• The transaction will simply not exist as far as

the books of the business are concerned.

b) Transposition error :

• Where a wrong sequence of individual

characters within a number is entered.

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ERRORS NOT REVEALED • For example K142 ,000 entered instead of K124,000.

• This is quite a common error and is very difficult to

spot when the error has occurred in both the debit

and the credit side, as the trial balance would still

balance.

c) Compensating errors:

• These occur where two or more errors, by chance,

cancel each other out.

• For example, if one account is over-debited by K2,000

and another account is over-credited with K2,000 or

two accounts are over-credited with K1,000 each.

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ERRORS NOT REVEALED

d) Errors of commission:

• These occur where the amount has been entered in the books in the right type of account, but not in the correct individual account.

• For example, A Jones, a customer, sends K6,500 to settle his account.

• This is correctly debited in the cashbook, but the credit entry is made in the account of A R Jones, also a debtor of the business.

• The trial balance will agree because a debit and credit entry have been made.

• Overall, the debtor's figure will be correct, but when this is broken down, A Jones' and A R Jones' accounts will both be incorrect.

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ERRORS NOT REVEALED

e) Errors of original entry :

• If the original entry in the day book is made wrongly, the entire record for that transaction will be wrong.

• This will mean double entry being done on the wrong figure.

f) Errors of principle:

• These are errors involving posting an entry to the wrong type or class of account –

• for example, debiting the purchase of a fixed asset to the purchases account instead of the asset account.

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ERRORS NOT REVEALEDg) Errors of complete reversal of entries:

• Where the correct accounts are used but each

item is shown on a wrong side of the account.

• For example if a cheque is paid to D.Wiliams for

K2,000 the double entry required is Dr

D.Williams and Cr Bank.

• In error if it is entered as Cr D.Williams and Dr

Bank account.

• The trial balance total will still agree.

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TYPES OF ERROR REVEALED BY THE

TRIAL BALANCE

a) The entering of debits on the credit side and

vice versa

b) The omission of balances

c) Incorrect amounts entered

d) Errors in addition, including errors in

balancing

e) Failure to complete the double entry–a debit

entered but not the corresponding credit, or

a credit entered without the debit.

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CORRECTION OF ERRORS

• We make corrections through double

entry to accounts after preparing journal

entries. We should:

1.Show the corrections by means of

journal entries, then

2.show the corrections in the double entry

set of accounts, by posting these

journal entries to the ledger accounts

affected.

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EXAMPLE:ERROR OF OMMISSION

• A sale of K59,000 worth of goods to E.George

on 1 July 2014 has been completely omitted

from the books.

• Prepare the Journal and the entries to the

ledger.

29

EXAMPLE ERROR OF COMMISSION

A purchase of K44,000 worth of goods

from C.Simons on 4 September 2014

was entered in error in C.Simpson ‘s

account.

The error was found on 30 September

2014.

Prepare the Journal and correct the error

in the accounts:

30

ERROR OF PRINCIPLE

The purchase of a machine by cheque

on 1 September 2014 for ,K200,000 is

debited to the purchases account instead

of being debited to a machinery account.

This error is discovered on 4 September

2014.

Show the journal and carry out a double

entry into the ledger.

31

COMPESANTING ERROR

The sales account is overcast by K20,000 as

also is the wages account. This error is

discovered on 4 September 2014

Show the necessary entries and posts to the

ledger to correct this error.

32

ERROR OF ORIGINAL ENTRY

A sale of K38,000 to A.Smiles was entered

in the books as K28,000 on 1 September

2014. This error is discovered on 4

September 2014.

Prepare a journal and enter the details in

the ledger accounts.

33

ERROR OF COMPLETE REVERSAL

A payment of cash of K16,000 to

M.Dickson ON 1 September 2014 was

entered on the receipts side of the Cash

Book in error and credited to M.Dickson ‘s

account. This error was discovered on 4

September 2014.

Prepare and journal and enter the

corrections in the ledger accounts.

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This is somewhat more difficult to adjust.

First must come the amount needed to

cancel the error, then comes the actual

entry itself.

Because of this the correcting entry is

double the actual amount first recorded.

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Overall when corrected the K16,000 debit

and K32,000 credit in the cash account

means there is a net credit of K16,000.

Similarly Dickson’s account shows

K32,000 debit and K16,000 credit , a net

debit of K16,000.

The final (net) answer is the same as

what should have been entered originally

the error is now corrected.

36

TRANSPOSITION ERROR

A credit purchase from P.Maclaran on 1

September 2014 costing K56,000 was entered

in the books as K65,000.The error was

discovered on 4 September 2014.

Prepare the journal and enter the transactions

in the ledger.

37

CASTING

Casting in accounting is a term used to

mean adding up.

Overcasting means incorrectly adding up

a column of figures to give an answer

which is greater than it should be.

Under casting means incorrectly adding

up a column of figures to give an answer

which is less than it should be.

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ERRORS AND THE TRIAL BALANCE

• Many errors will mean that the trial

balance totals will not be equal.

• These include:

Incorrect additions in any account.

Making an entry on only one side of the

accounts.

Entering a different amount on the debit

side from the amount on the credit side

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SUSPENSE ACCOUNT

We should try very hard to find errors

when the trial balance totals are not

equal.

When they cannot be found, the trial

balance totals can be made to agree with

each other by inserting the amount of the

difference between the two sides in a

suspense account.

This is demonstrated below:

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SUSPENSE ACCOUNTTrial Balance as at 31st December 2014

Dr Cr

K’000 K’000

Totals after all the

accounts have been listed100,000 99,960

Suspense 40

100,000 100,000

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SUSPENSE ACCOUNT CONTINUEDTo make the two totals the same, a figure

of K40,000 for the suspense account has

must be shown on the credit side of the

trial balance.

A suspense account is opened and the

K40 000difference is also shown there on

the credit side.

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SUSPENSE ACCOUNT AND THE

BALANCE SHEET

If the errors are not found before the financial

statements are prepared, the suspense

account balance will be included in the

balance sheet.

Where the balance is a credit balance, it

should be included on the capital and

liabilities side of the balance sheet.

When the balance is a debit balance it should

be shown on the assets side of the balance

sheet.

SUSPENSE ACCOUNT AND THE BALANCE

SHEET

If Suspense entry is

a debit balance

Enter

On statement of

financial position

with

ASSETS

If Suspense entry is a credit balance

Enter

On statement of financial position

with

CAPITAL AND

LIABILITIES

44


When the errors are found they must be

corrected using double entry.

Each correction must first have an entry

in the journal describing it, and then be

posted to the accounts concerned

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CORRECTION OF ERRORS-ONE ERROR ONLY

Example 1:

Assume that the error of K40,000 shown above is

found the following year on 31 March 20135.

The error was that the sales account was undercast by

K40,000.

Correct the error and show required entries in the

accounts.

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CORRECTION OF MORE THAN ONE ERROR

• The trial balance at 31st December 2014 showed a difference of K77,000,being shortage on the debit side.

• A suspense account is opened ,and the difference of K77,000 is entered on the debit side of the account.

• On 28 February 2015 all the errors from the previous year were found

a. A cheque of K150,000 paid to l Kent had been correctly entered in the cash book, but had not been entered in Kent’s account.

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CORRECTION OF MORE THAN ONE ERROR

b. The purchase account had been

undercast by K20,000

c. A cheque of K93,000 received from K.

Sand had been correctly entered in the

cashbook, but had not been entered in

Sand ‘s account.

• Show journal entries and post them in

them ledger accounts

48

EFFECTS OF ERRORS ON PROFITS Some errors will have meant that original profits will be wrong .

Other errors will have no effect upon profits.

EXAMPLE

K Davis Trading and Profit and loss account for the year

ending 31 December 2014

K’000 K’000

Sales 180,000

Less: Cost of sales

Opening stock 15,000

Add: Purchases 92,000

107,000

Less :Closing stock (18,000)

Cost of sales (89,000)

Gross profit 91,000

49

EFFECTS OF ERRORS ON PROFITS CONTINUEDK’000 K’000

Gross profit 91,000

Add: Discounts received 1,400

Total income 92,400

Less: Expenses

Rent 8,400

Insurance 1,850

Lighting 1,920

Depreciation 28,200

Total expenses (40,370)

Net profit 52,030

50

EFFECTS OF ERRORS ON PROFITS CONTINUEDStatement of financial position as at 31st December 2014

K’000 K’000

Non-Current assets

Equipment 62,000

Less: Depreciation to date (41,500)

20,500

Current assets

Stock 18,000

Debtors 23,000

Bank 19,000

60,000

Less: current liabilities

Creditors (14,000) 46,000

Suspense 80

66,580

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EFFECTS OF ERRORS ON PROFITS CONTINUED

K’000

Capital

Balance as at 1 January 2014 46,250

Add: Net profit 52,030

98,280

Less: Drawings (31,700)

66,580

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EXAMPLE1 : ERROR WHICH DO NOT AFFECT

PROFITS CALCULATIONS

• If an error affects items only in the statement of

financial position, then the original calculated

profit will not need altering.

• Assume the K80,000 debit balance on the

suspense account was because on 1st

November 2014 we paid K80,000 to a creditor

• T Monk. It was correctly entered in cash book

but not entered anywhere else. The error was

discovered on 2 June 2015.

• Show the journal required to correct the error.

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EXAMPLE1 : ERROR WHICH DO NOT AFFECT PROFITS

CALCULATIONS

Both of the accounts appeared in the

statement of financial position only with

T.Monk as part of accounts .

The net profit of K52,030,000 does not

have to be changed.

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EXAMPLE 2:ERROR WHICH AFFECTS

THE PROFIT CALCULATIONS

• If the error is in one of the figures shown in the trading and profit and loss account, then the original profit will need altering.

• Assume that the K80,000 debit balance was because the rent account was added up incorrectly.

• It should be shown as K8,480,000 instead of K8,400,000.

• The error was found on 1 June 2015.

• Prepare the journal entries and a statement of corrected profits.

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EXAMPLE 2:ERROR NOT AFFECTING THE

PROFIT CALCULATIONS

Statement of corrected Net profit for the year

ending 31 December 2014

K’000

Net profit per the financial statements 52,030

Less:Rent understated (80)

Corrected net profit for the year 51,950

56 EXAMPLE 3: WHERE THERE HAVE BEEN

SEVERAL ERRORS

Assume that the K80,000 found in K.Davis ‘s

ledger accounts on 31 March 2015 was as a

result of the following four errors:

a. Sales overcast by K90,000

b. Insurance under cast K40,000

c. Cash received from a debtor , E.Silva entered

in the cash book only K50,000

d. A purchase of K59,000 is entered in the books

,debit and credit as K95,000.

Prepare the journal entries and the adjusted

net profit? Net profit K52,030,000

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Only those errors which make the trial

balance totals different from each other

can be corrected via the suspense

account.

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CLASS EXERCISE The trial balance of Mary Harris a sole trader as at 31 December 2014 showed a difference which was posted to a suspense account.

Draft final accounts for the year ended 31 December 2014 were prepared showing a net profit of K47, 240,000.The following errors were subsequently discovered:

i. Sales of k450, 000 to C.Thomas had been debited to Thomasson Manufacturing Ltd.

ii. A payment of K275, 000 for telephone charges had been entered on the debit side of the telephone account as K375,000.

iii. The sales journal had been under cast by K2, 000,000.iv. Repairs to the machine amounting to K390,000 had been

charged to Machinery account.

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CLASS EXERCISEi. A cheque for K1, 500,000 being rent received from Atlas

Ltd had only been entered in the cash book.

ii. Purchases from P .Brooks amounting to K765,000 had

been received on 31 December 2014 and included in the

closing stock at that date but the invoice had not been

entered in the purchases journal.

Required

a) Give the journal entries without narratives necessary to

correct the above errors.

b) Show the effect of each of these adjustments on the net

profit in the draft accounts and the correct profit for the

year ended 31st December 2014

petty cash book - university of lusaka · the petty cash book lists all cash payments for small ......

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