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This is true except for bad debts or doubtful accounts and depreciation. Being in nature of an expense accounts and valuation accounts, absence of adjustments would overstate the operational performance of the business and at the same time overstate valuation of the particular asset it is supposed to reduce to its realizable value. Such absence would affect only the particular period where adjustment was omitted. To illustrate, salaries and wages of workers should be recorded as expense for the period, even if the actual payment falls on the following period. Failure to record the expense would understate salaries and wages for the year as well as understatement or omission of a liability regarding the same. The effect is an overstated operating income, specially when the object of the business is service and salaries is a direct cost of operations.
A petty cash fund is an operating cash fund used for petty or small disbursements where an issuance of check is not considered practical and convenient. Such fund is usually under the charge of the cashier or to a particularly designated petty cash custodian. The establishment and replenishment of the petty cash fund are recorded in the Book of Accounts of the company. The actual disbursements from such fund are recorded in a separate petty cash book with reference to the amount taken, purpose and the requesting party. This means disbursements amounting less that the established amount should be taken out from the fund. At the end of the month, the fund was replenished representing the total of the approved paid vouchers. However, what was accounted for amounted only to $58, the total of the vouchers and remaining cash. There is a shortage of $2. Thus, the Cash Short or Over account is used which is a temporary account in order to replenish the fund to its established amount.
In the problem before us, the entry to establish the petty cash fund as well as the replenishment for the month of August is as follows:
August
Petty Cash Fund
Cash
The shortage should be attributed to the cause of the loss. In this case, the problem is silent as to how the shortage occurred. Usually, the amount of shortage is charged against the custodian. The Cash Short or Over account is then replaced with a proper classification of the loss, the entry as follows:
Accounts Receivable - Custodian
Cash Short or Over to replace Cash Short or Over account
Bibliography
Adjusting Entries (2007). Retrieved April 19, 2007, at http://www.netmba.com/accounting/fin/process/adjusting
Trial Balance. (2007). Retrieved April 19, 2007 from http://www.quickmba.com/accounting/fin/trial-balance
Petty Cash account (2007). Retrieved April 19, 2007 from http://www.elca.org/treasurer/congregations/pettycash.html
Bibliography
Adjusting Entries (2007). Retrieved April 19, 2007, at http://www.netmba.com/accounting/fin/process/adjusting
Trial Balance. (2007). Retrieved April 19, 2007 from http://www.quickmba.com/accounting/fin/trial-balance
Petty Cash account (2007). Retrieved April 19, 2007 from http://www.elca.org/treasurer/congregations/pettycash.html
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