Purpose: To help you understand the importance of cash flows in the operation of a small business.

You’re sitting in your CPA office late on a Friday afternoon when you get an e-mail from a friend. You know that she has been working on setting up a new accounting system in her office for a new business that she just started. You figured that this would eventually generate some communication between the two of you because you know that she has relatively limited accounting knowledge. Here’s her e-mail to you:

“Jerry, I’m pretty frustrated right now! As you know, I’ve been installing this new accounting system here in the office and I’ve run into a problem. I don’t understand this Cash account. I have purchased some items on my debit card and I’ve purchased some items on my credit card. So logically, when I purchased the items on my debit card, I debited the Cash account. But when I used my credit card, it made sense to credit my Cash account. And to make things even worse, my Cash account ends up with a credit balance, and I’m pretty sure that’s not right. This is too confusing and it’s Friday afternoon; I’m going home!”

The following journal entries were attached to your client’s e-mail:

Requirement
Since Cash is the lifeblood of any business, having a correct balance in the Cash account is of utmost importance. Correctly entering cash transactions is equally important. Suggest to your client the corrections that need to be made to the journal entries shemade.

Transcribed Image Text:

DATE ACCOUNTS May 5 Cash POST REF I I CR. 400 1 DR. Supplies 400 Purchased supplies using debit card DATE ACCOUNTS May 6 Uilities Expense POST REF. | DR. CR 250 Cash 250 Paid utilities bill using credit card