8 4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries Principles of Accounting, Volume 1: Financial Accounting


In larger corporations, each department might have its own petty cash fund. The bottom portion of the petty cash log won’t be completed until the cash in the lockbox needs to be replenished. There’s no need to make journal entries when expenses are reimbursed from cash in the lockbox. Most companies maintain a petty cash fund balance of anywhere from $100 to $500, but the amount will depend on your petty cash needs. To illustrate further, assume that we have a fund balance of $500. Our policy states that petty cash reimbursements shouldn’t exceed 10% of the fund balance.

  • Nonetheless, the accounting for both items is similar since they involve spending or receiving money.
  • Having petty cash on hand eliminates the need to constantly write cheques or use company credit cards for these small purchases.
  • A replenishment transaction is initiated by the petty cash custodian.
  • The custodian of the petty cash fund is in charge of approving and making all disbursements from the fund.

Consequently, they can manage their petty cash funds more smoothly. When accounting for those funds, companies must reconcile different departments’ balances. Overall, petty cash refers to money held to fund minor purchases or expenses. Companies use this cash how to calculate total cost: 13 steps to avoid going through the complications of banking transactions. If the management at a later date decides to decrease the balance in the petty cash account, the previous entry would be reversed, with cash being debited and petty cash being credited.

The custodian would use the $176 to restore the amount of cash to $200. The size of the fund depends on the company’s needs, but it should be large enough to last at least three to four weeks. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Get up and running with free payroll setup, and enjoy free expert support.

Petty cash replenishment definition

The total of the receipts and remaining cash should equal the initial amount of petty cash funding at all times. However, recordation errors and theft may result in a variance from the initial funding amount. For petty cash accounting, you must create a log detailing your transactions. And, you must record a petty cash journal entry when you put money into the petty cash fund and when money leaves the fund.

In all cases, the amount of the purchase using petty cash would be considered to not be material in nature. Recall that materiality means that the dollar amount in question would have a significant impact in financial results or influence investor decisions. Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash needs. Examples of these payments are office supplies, cards, flowers, and so forth. Petty cash is stored in a petty cash drawer or box near where it is most needed. There may be several petty cash locations in a larger business, probably one per building or even one per department.

What is Petty Cash Replenishment?

Whatever steps are deemed necessary (such as surprise counts) should be performed to assure that controls are adequate. The check is cashed and the money is placed under the control of one designated individual. This ensures that one individual can be held responsible for all the cash in the fund. These expenditures include items such as postage, delivery expense, and minor office supplies (e.g., coffee). Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

Financial and Managerial Accounting

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. 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. The journal entry for this action involves debits to appropriate expense accounts as represented by the receipts, and a credit to Cash for the amount of the replenishment. Notice that the Petty Cash account is not impacted — it was originally established as a base amount, and its balance has not been changed by virtue of this activity.

We can make the petty cash replenishment journal entry by debiting the expenses accounts and crediting the cash account for the petty cash expenses that we have so far. A check for cash is prepared in an amount to bring the fund back up to the original level. The check is cashed and the proceeds are placed in the petty cash box. At the same time, receipts are removed from the petty cash box and formally recorded as expenses. A petty cash custodian should be designated to safeguard and make payments from this fund.

As a company grows, it may find a need to increase the base size of its petty cash fund. Otherwise, take note that the only entry to the Petty Cash account occurred when the fund was established. ABC has set petty cash for some time already, so there is no journal entry to record the petty cash at the beginning of the month. They simply increase petty cash balance and deduct cash at the bank.

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. It’s not really an adjusting journal entry because there is an actual transaction being recorded.

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. The transaction will increase expenses and decrease cash at bank. At the month-end, the cashier will summarize all expenses during the month and request the petty cash replenish. (Figure)Even though technology has improved the internal control structure of a company, a supervisor cannot depend totally on technology. Discuss other internal controls a supervisor needs to implement to ensure a strong structure.

Replenish Petty Cash Journal Entry

Next, let’s assume that there is only $20.00 in cash remaining and Mary realizes that $20 is not sufficient. She needs to obtain a company check for $80 in order to cash it and return the cash amount to $100 (the amount shown in the Petty Cash account). The petty cash vouchers provide the documentation for the $80 check request. In the process Mary discovers that the vouchers add up to only $79. Mary will debit the accounts indicated on the petty cash vouchers and then debit Cash Short and Over for $1 (the amount that is not accounted for).

To accomplish the reimbursement, the treasurer’s office provides the requested amount (by check or currency) to the custodian. The security aspect is often important to small companies, who have long feared that keeping cash around is an invitation to crime. After we click the green Save button, the first entry should appear like in the image below. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

Mary is the petty cash custodian who is the only person handling the petty cash transactions. At all times Mary should have some combination of cash and petty cash vouchers (receipts) that are equal to $100. At the end of July, in the petty cash box there should be a receipt for the postage stamp purchase, a receipt for the milk, a receipt for the window cleaner, and the remaining cash. The employee in charge of the petty cash box should sign each receipt when the purchase is made.

The entry to record the reimbursement would debit the expense accounts reported by the custodian. The total petty cash expenditure is 60 (supplies 40 + postage 20). 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). The first journal entry is debiting expense (small expense) and credit petty cash.

How To Do Petty Cash Accounting & Recording in 6 Steps

There are different ways of tracking transactions in a petty cash book. Some organizations use a separate cash register for the petty cash, and others just track the transactions on ordinary receipts or invoices. How you track your costs does not matter as long as it is consistent. Because a petty cash voucher is made out for all disbursements, the total of the vouchers and the remaining cash should always equal the amount of the fund (in this case, $100).

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