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# The Revenue/Receivables/Cash Cycle EM Chapter 6 343

## Beginning balance 16,000

Sales 1,000,000
Collections 994,000

## Ending balance 20,000

What happened to the \$1,000 related to the amounts written off as uncollectible?
Because that amount appeared as a credit in the receivables account and a debit in the
allowance account, it will net out to \$0 when the two accounts are combined.
The statement of cash flows, when net accounts receivable are presented, can be
prepared from the following information.

Cash Flows
Sales \$1,000,000 \$ (4,000) \$996,000
Bad debt expense (2,000) 0 (2,000)
] Cash collected from customers

## Cash expenses (898,000) 0 (898,000) Cash paid for expenses

Net income \$ 100,000 \$ (4,000) \$ 96,000 Cash from operations

Sales is simply adjusted for the change in the net receivables account.Why is there
no adjustment to bad debt expense in this case? Because the two accounts were netted
together, all adjustments are netted together as well and result in the \$4,000 adjustment.
Using net receivables, the net cash flows provided by operations during the period
would be presented as follows:

Direct Method

## Cash collected from customers .............................................................................................................. \$ 994,000

Cash expenses ....................................................................................................................................... (898,000)
Net cash flows provided by operations ................................................................................................ \$ 96,000

Indirect Method

## Net income ............................................................................................................................................. \$ 100,000

Less: Increase in net accounts receivable.............................................................................................. (4,000)
Net cash flows provided by operations ............................................................................................... \$ 96,000

In the vast majority of cases, net receivables are presented and the indirect method
is used. In these instances, the only adjustment required relates to the change in the net
accounts receivable balance.

## PETTY CASH FUND

Use a petty cash fund. Immediate cash payments and payments too small to be made by check may be made
from a petty cash fund. Under an imprest petty cash system, the petty cash fund is
created by cashing a check for the amount of the fund. In recording the establishment of
the fund, Petty Cash is debited and Cash is credited.The cash is then turned over to a
cashier or some person who is solely responsible for payments made out of the fund.
The cashier should require a signed receipt for all payments made.These receipts may
be printed in prenumbered form. Frequently, a bill or other memorandum is submitted
when a payment is requested. A record of petty cash payments may be kept in a petty
cash journal.
344 Part 2 EOC Primary Activities of a Business

Whenever the amount of cash in the fund runs low and also at the end of each fiscal
period,the fund is replenished by writing a check equal to the payments made.In record-
ing replenishment, expenses and other appropriate accounts are debited for petty cash
disbursements and Cash is credited.When the fund fails to balance, an adjustment is usu-
ally made to a miscellaneous expense or revenue account, sometimes called Cash Short
and Over.Unless theft is involved,this will usually involve only a nominal amount arising,
for example, from errors in making change.
As noted above, a petty cash fund is usually replenished at the end of each fiscal
period. If replenishment does not occur at year-end, however, an adjustment to Petty
Cash is required to properly record all expenditures from the fund during the period.The
debit entries would be the same as those to record replenishment;the credit entry would
be to Petty Cash, reflecting a reduction in that account.
To illustrate the appropriate entries in accounting for petty cash, assume that Keat
Company establishes a petty cash fund on January 1 in the amount of \$500.The follow-
Petty Cash ........................................................................................................................ 500
Cash ........................................................................................................................... 500
To establish a \$500 petty cash fund.

During the next six months, the person responsible for the fund made payments for
office supplies (\$245), postage (\$110), and office equipment repairs (\$25). Receipts for
these items are maintained as evidence supporting the petty cash disbursements.On July
1 the fund is replenished.At that time the coin and currency in the fund totaled \$115.The
entry to record the expenses and replenish the fund would be:
Office Supplies Expense.................................................................................................. 245
Postage Expense .............................................................................................................. 110
Repairs Expense .............................................................................................................. 25
Cash Short and Over (or Misc. Expenses) ..................................................................... 5
Cash ........................................................................................................................... 385
To record expenses and replenish the petty cash fund.

After this entry, the fund would be restored to its original amount, \$500. If Keat
Company decided to reduce the fund to \$400, an entry would be required as follows:
Cash ................................................................................................................................. 100
Petty Cash .................................................................................................................. 100
To reduce the petty cash fund from \$500 to \$400.

The entry to increase a petty cash fund is the same as to establish the fund initially
a debit to Petty Cash and a credit to Cash. However, petty cash funds should only be large
enough to cover small expenditures. Large amounts should be disbursed through an
authorized voucher system

## REVIEW OF LEARNING OBJECTIVES

Explain the normal operating cycle of a Prepare journal entries to record sales
business. The operating cycle is the lifeblood of revenue, including the accounting for bad
almost every business.The critical event for a business is debts and warranties for service or replacement. A
the sale of goods or services.This sale often results in an sale is recorded with a credit to Sales Revenue and a debit
account receivable being recorded. The account receiv- to either Accounts Receivable or Cash. The matching
able is then collected, the resulting cash is reinvested in principle requires that expenses associated with the sale
the business, and the cycle begins again. be recorded in the period of the sale. As a result, items