Year: 2023

The greatest degree of internal control can be maintained when a petty cash fund under the control of one individual is established to handle these expenditures. At the end of the month, assume the $100 petty cash fund has a balance of $6.25 in actual cash (a five-dollar bill, a one-dollar bill, and a quarter). Frank, who is the responsible person, has been filling out the voucher during the month, and all the receipts are stapled to the voucher. The journal entry is debiting expense $ 400 and credit cash on hand $ 400.

The following are the transactions that happened during the month of April. The petty cash must keep in a proper locker in order to prevent any thief or miss place which can lead to the loss of company assets. If the amount is significant, the cash should keep in safe and key need to separate to more than one person. After a designated interval—usually, the same time each month or week—it’s time to reconcile or balance the petty fund account. This sum is the total withdrawn from the account during that time period. On the downside, the convenience of petty cash can also make it a problem, and a risk.

For control purposes, vouchers are sequentially prenumbered and signed by both the person requesting the cash and the custodian. After the cash is spent, receipts or other relevant documents should be returned to the petty cash custodian, who attaches them to the voucher. During the month, the petty cash will be used to pay for small expenses.

The logical first step is to document the reimbursement, for example by writing out a receipt. The next step is to enter both an expense and an asset account on your books under “petty cash”. If you are reimbursed $20 for postage expenses, debit postage expense $20 and credit cash $20. Small payments cost insurance and freight are often needed for postage, delivery charges, office supplies, or entertainment expenses. A petty cash fund provides an efficient way of handling these payments. When you put money into the fund, you must create a journal entry debiting your Petty Cash account and crediting your Cash account.

Petty Cash vs. Cash on Hand

For example, employees cannot use petty cash to buy themselves coffee. Read on to learn about establishing a petty cash fund, handling petty cash accounting, reconciling your petty cash account, and claiming a tax deduction. If the vouchers total $130 but the fund needs only $125, the journal entry includes a $5 credit to the cash over and short account.

Consider recording petty cash transactions in your books at least once per month. If the voucher amounts do not equal the cash needed to replenish the fund, the difference is recorded in an account named cash over and short. This account is debited when there is a cash shortage and credited when there is a cash overage. Cash over and short appears on the income statement as a miscellaneous expense if the account has a debit balance or as a miscellaneous revenue if the account has a credit balance. In the journal entry below, the vouchers total $130 but the fund needs $135, so the entry includes a $5 debit to the cash over and short account.

He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

In reality, the balance in the petty cash account is higher than the amount of cash actually in the petty cash box, since the cash in the box is continually being paid out. However, the difference is so minor that it is completely immaterial to the results in the financial statements. Thus, the difference is only reconciled when the petty cash box must be replenished. Notice that the appropriate expense accounts are debited and that cash is credited. There is no need to make an entry to the petty cash account because it still shows a balance of $100.

The cashier will not down the cash payment and attach documents such as invoices. At the end of the month, the cashier will summarize those expenses and prepare petty cash replenishment. It will increase the petty cash balance to the floating balance again. A petty cash fund is a current asset account that should appear on your balance alongside other cash accounts, such as checking and savings accounts.

• On the downside, the convenience of petty cash can also make it a problem, and a risk.
• Petty cash funds are used to purchase items for your business, reimburse employees who purchased business items, or to make change.
• Here, the bank account will be the credit side, while the petty cash account is the debit.
• Assume that when the box is counted, there are $45 in receipts and $25 in cash.
• At the time the fund is established, the following journal entry is needed.
• By combining the journal entries, Petty Cash isn’t adjusted and the expenses are recorded coming directly from the checking account.

Usually, companies use “petty cash” to denote this account in their books. The answer to how to record the journal entry for petty cash is not straightforward. As stated above, the petty cash account may include different types of transactions. A petty cash fund is established by transferring a specified amount of cash from the general checking account to a person who is given custodial responsibility for the fund. This petty cash replenishment journal entry is one of many bookkeeping entries used in accounting, discover another at the links below.

Why Is It Called Petty Cash?

On the far right of the column, click View Register to arrive at the petty cash register. The amount of money in the fund must be consistent with the amount listed in the general ledger account. If the amount in the fund is below the amount listed in the general ledger, a check should be written for the difference and the amount credited to Cash. Replenishment of the fund is typically done in the same manner as the initial deposit, that is, with cash. The custodian is responsible for verifying that the amount is sufficient to cover the expenses and also that the amount is kept to the maximum limit.

Accounting Ratios

Compare this amount to the total amount listed on your receipts to determine if your accounts are equal. Petty cash funds are useful alternatives to writing checks or using your business credit card to cover small expenses. Petty cash funds are used to purchase items for your business, reimburse employees who purchased business items, or to make change. An employee using petty cash should provide a receipt for the purchase to the petty cash custodian. Give the receipt to your finance department or the person who handles your small business books.

How Do You Record the Journal Entry for Petty Cash?

A petty cash fund is a type of imprest account, which means that it contains a fixed amount of cash that is replaced as it is spent in order to maintain a set balance. This is to ease the process of recording the accounting transactions and this usually works very well as long as there is proper petty cash control in place (e.g. dual signatures). Petty cash replenishment occurs when funds are added to a petty cash box. The amount of the replenishment should be sufficient to bring the cash balance of the cash box back up to its designated balance. Replenishment is required periodically, as cash payments from the petty cash box are used to pay for incidental expenses. A replenishment transaction is initiated by the petty cash custodian.

Having a petty cash account is  just more convenient than going to the accounts payable clerk every time someone needs a stamp or a liter of coffee for a meeting. Companies replenish the petty cash fund at the end of the accounting period, or sooner if it becomes low. (Sometimes we refer to this fund as an imprest fund since it is replenished when it becomes low.). To determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure. The journal entry to record replenishing the fund would debit the various accounts indicated by the summary and credit Cash. To permit these cash disbursements and still maintain adequate control over cash, companies frequently establish a petty cash fund of a round figure such as $100 or $500.

Keeping careful records of cash expenditures will be a huge help when it comes time to reconcile your petty cash account. However, using accounting software, like QuickBooks Online, can make managing petty cash expenses easier and faster because it simplifies the recording of expenses. When replenishing the petty cash fund, the journal entry records the debit to the Petty Cash account and the credit to the company’s bank account. This will result in a decrease in the company’s cash balance and an increase in the petty cash balance. Let’s assume that a company has a petty cash fund of $100 and its general ledger account Petty Cash has a debit balance of $100.

Time Value of Money

This will ensure that the fund is adequately replenished and that the system is monitored for any discrepancies. Moreover, it is important to periodically review the transactions and adjust the fund accordingly. The Galaxy’s Best Yogurt establishes a petty cash fund on July 1 by cashing a check for $75 from its checking account and placing cash in the petty cash box.

Recording Petty Cash

The Cash Over and Short account can be either an expense (short) or a revenue (over), depending on whether it has a debit or credit balance. Note that the entry to record replenishing the fund does not credit the Petty Cash account. In this case, the cash needed to get back to $100 ($100 fund – $7.40 petty cash on hand) of $92.60 equals the total of the petty cash vouchers. Whenever someone in the company requests petty cash, the petty cash custodian prepares a voucher that identifies the date, amount, recipient, and reason for the cash disbursement.