When you first set up a petty cash fund, you create a journal entry to transfer the initial cash amount to the petty cash account. When you put money into the fund, you must create a journal entry debiting your Petty Cash account and crediting your Cash account. A replenishing petty cash fund journal entry designated employee, the petty cash custodian, accounts for your business’s use of petty cash.
After all, the petty cash expenses will only be recorded when we make petty replenishment. Hence, it is more efficient to just record all those expenses with the cash account directly. The journal entry is debiting expense $ 400 and credit cash on hand $ 400.
Any discrepancy should be debited or credited to an account called Cash Over and Short. 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. 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. 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).
It will involve the affected expense account as a debit and the petty cash account as a credit. While other activities may also affect it, they are a type of the above two items. Similarly, the debit and credit side of the journal entries will always include the petty cash account. A petty cash fund is a small amount of money available for handling small expenses and miscellaneous payments. It is often used in business for making payments that are too small to make by check or credit card.
How to Journalize Petty Cash Replenishment
In this case, there is a cash overage of $2 and we need to replenish only $78 ($100 – $22) in order to reach the full amount of $100 in our petty cash fund. In accounting, we usually record the cash transaction immediately into our accounting record whether it is the cash inflow or the cash outflow from the company. However, when there is a petty cash outflow, we usually do not record it into the accounting record immediately. On May 20, 2024, your business spends $30 of the petty cash fund on miscellaneous items such as coffee for the office. On April 15, 2024, your business used $100 from the petty cash fund to pay for a taxi ride for a business meeting. When the petty cash fund runs low, you replenish it by writing a check or withdrawing cash from the bank to bring the fund back to its original amount.
Popular Double Entry Bookkeeping Examples
Companies use this cash to avoid going through the complications of banking transactions. Companies maintain a petty cash system to handle any money kept on hand. Before discussing its accounting, it is crucial to understand the concept first. To ensure efficient management of resources, the replenishment of money allocated for small purchases must be regularly monitored. Replenishing petty cash is the act of returning a significant amount of cash in the petty cash box to the amount listed in the general ledger account.
- However, most companies have transferred these transactions to their banks.
- For example, a retailer will compare daily cash sales to the actual cash found in the cash register drawers.
- The Cash Short (Over) account is an income statement type account.
- However, companies may also limit how much a customer can pay into this account.
- A check for cash is prepared in an amount to bring the fund back up to the original level.
When the petty cash fund gets too low, you must refill it to its set amount. Then, create another journal entry debiting the Petty Cash account and crediting the Cash account. After the check is cashed, the petty cash custodian normally places the money in a small box that can be locked. We will not use the petty cash in a journal entry again unless we are changing this original amount. The Cash Short (Over) account is an income statement type account. For example, a retailer will compare daily cash sales to the actual cash found in the cash register drawers.
A proper petty cash reimbursement journal entry ensures that business expenses are accurately tracked and the petty cash fund remains functional. Petty cash ensures that businesses can quickly address minor expenses without needing a lengthy approval process. Proper management of petty cash through accurate journal entries helps maintain financial accuracy and transparency. During the accounting period, ABC Co. paid for various expenses from this account. Therefore, ABC Co. uses the following journal entry to record those transactions. On the other hand, companies must also account for any receipts in the petty cash account.
- Since most petty cash purchases are for business expenses, you will likely be able to deduct them from your business’s taxes at year-end.
- A petty cash fund is established with a fixed amount and is replenished periodically as it is used.
- You would use your petty cash fund to reimburse your employee for the purchase of the supplies.
- Sometimes, there is a cash overage after we reconcile the fund remaining in the petty cash box to the petty cash receipts that represent all the expenses using the petty cash fund.
- 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.
- Companies use this cash to avoid going through the complications of banking transactions.
Journalizing Petty Cash Transactions
At all times, the employee responsible for petty cash is accountable for having cash and petty cash vouchers equal to the total amount of the fund. On the other hand, they also put cash into this system through their bank account. It usually involves recording two types of transactions, payments, and receipts. Lastly, ABC Co. used its bank account to deposit $1,500 into the petty cash account.
Petty cash and taxes
To replenish the fund the expense vouchers need to be replaced by cash of 60, bringing the total cash in the fund back to its original 300 (240 + 60). Petty cash replenishment refers to the process of restoring the cash balance in the petty cash fund back to its original imprest amount. In accounting, we usually have the cash over and short account to represent both cash overage and cash shortage as their amount is usually small. Hence, we usually net them off against each other by recording the cash over and short on the debit side for the cash shortage. And if it is a cash overage, we will record it on the credit side instead.
If they are used to having access to extra funds for small purchases, they may begin to expect it as a regular perk of the job. For these reasons, it is important to weigh the risks and benefits of using company petty cash before making a decision. Lastly, you should choose a maximum amount that employees can request for petty cash transactions. If the employee needs to spend more than the petty cash request limit, they can use the business credit card.
The remaining balance is only $ 100, so it requires replenishing from the cash on hand accounts. In fact, there is always $100 in the box if you add up all the receipts and the cash (more or less, depending on the cash over/short situation). This system simply delays the recording of small expenses until the end of the accounting cycle or the fund is replenished.
If the business decides to increase the petty cash fund, the excess amount is transferred to the petty cash account. The second journal entry is debiting petty cash $ 400 and credit cash on hand $ 400. First of all, there is always the potential for theft or misappropriation of funds.
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A petty cash voucher is a document or form that shows the amount of and reason for a petty cash disbursement. Petty cash refers to a system of holding insignificant sums of funds to pay for minor expenses. Companies use this system to keep money at hand to meet small needs as they arise. However, keeping significant amounts of money at hand can have some risks.
