Evaluating the Choice of Book of Prime Entry at Kedai Seri Wangi

Books of Prime Entry

Skill: Evaluate

Stimulus

Question

(a) Evaluate whether each transaction was recorded in the correct book of prime entry. Identify the mis-recorded transactions, justify your judgement, and state the book that should have been used.

(b) Based on the VALID petty expenses only, evaluate whether the RM250 imprest is suitable and recommend a sensible float amount with justification.

(c) Justify whether the business should continue using the imprest system for the Petty Cash Book.

Thinking steps

1. Identify the traits of a transaction that qualifies for the Petty Cash Book: small, frequently recurring revenue expenses paid in cash, below a set limit.
2. Test each transaction against those traits and flag the ones that breach them (large value, capital expenditure or paid by cheque).
3. Determine the correct book of prime entry for the mis-recorded items (cheque payments for an asset or a creditor go to the Cash Book).
4. Total ONLY the valid petty expenses and compare against the imprest amount to judge whether the float is adequate.
5. Weigh a float set too high (ties up cash) against one too low (runs out often) to recommend a sensible amount.
6. Evaluate the merits of the imprest system (fixed restoration, receipt accountability and internal control) to reach a justified decision.

Model answer

(a) VALID petty expenses (small, recurring revenue expenses paid in cash): postage RM45 + stationery RM60 + vehicle fuel RM70 + meeting refreshments RM30 = RM205. WRONGLY RECORDED: (i) Purchase of office furniture RM250: this is capital expenditure (acquisition of a non-current asset), large in value and settled by cheque, so it belongs in the Cash Book (bank column), not the Petty Cash Book. (ii) Payment of debt to Syarikat Maju RM180: this settles a creditor, is large in value and was paid by cheque, so it belongs in the Cash Book (bank column). Both breach the basic test of the Petty Cash Book: 'small, frequent and in cash'.

(b) Actual petty expenses are only RM205 a month, while the imprest is RM250. The RM250 float is ADEQUATE because it covers RM205 and still leaves a buffer of about RM45 for unexpected spending. Recommendation: keep the imprest at RM250 (perhaps RM250-RM280 if petty spending is expected to rise), because a float set too high needlessly ties up cash while one set too low runs out before the restoration date.

(c) Continue the imprest system. Justification: (i) the fixed float is restored each month only by the amount spent, so the balance is always verifiable (float = cash in hand + total vouchers); (ii) it creates accountability because the clerk must produce receipts before the float is topped up; (iii) it relieves the main Cash Book of many small entries. The system gives good internal control over small payments.