Spencer Co.decides to establish a petty cash fund with a beginning balance of $200.The company decides that any purchase under $25 can be processed through petty cash instead of the voucher system.The journal entry to record establishing the account is:
A)Debit Cash $200 and credit Petty Cash $200.
B)Debit Cash $200 and credit Cash Over and Short $200.
C)Debit Petty Cash $200 and credit Cash $200.
D)Debit Petty Cash $200; credit Cash $175; and credit Cash Over and Short $25.
E)Debit Cash $200 and credit Petty Cash Over and Short $200.

Question

Quizplus · Accepted Answer

When establishing a petty cash fund, we debit Petty Cash account to increase it and credit Cash account to decrease it. The journal entry to establish the petty cash fund would thus be Debit Petty Cash $200 and Credit Cash $200. None of the other options are correct as they either involve Cash Over and Short account (which is not needed for establishing a petty cash fund) or do not properly account for the increase in Petty Cash account.