Petty Cash Accounting: Journal Entries & Reconciling Accounts

Each disbursement requires a journal entry that credits Petty Cash and debits the expense account listed on the petty cash voucher. Policies should be established regarding appropriate expenditures that can be paid from petty cash. When a disbursement is made from the fund, a receipt should be placed in the petty cash box. At any point in time, the receipts plus the remaining cash should equal the balance of the petty cash fund (i.e., the amount of cash originally placed in the fund). The petty cash fund is reconciled periodically to verify that the balance of the fund is correct. Typically, as the petty cash balance falls to a preset level, the custodian applies for additional cash from the cashier.

On the far right of the column, click View Register to arrive at the petty cash register. Petty cash lets companies avoid complex processes related to the banking system. As you think back on this system, note that there are several internal controls in place, most notably segregation of duties, assignment of responsibility, and a reconciliation (monitoring) process. In the next section, we’ll look at one of the most important cash controls, the bank reconciliation process, in detail.

Companies may also allocate petty cash budgets to various departments. 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 to avoid going through the complications of banking transactions. 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.

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  • Petty cash is useful for businesses to keep on hand whether they are just one-person proprietorships, such as a financial advisor, or all the way up to a small business with multiple divisions.
  • If the amount is $100, the company check will be coded to debit Petty Cash for $100 and to credit Cash for $100.
  • Overall, petty cash refers to money held to fund minor purchases or expenses.
  • It works well to cover small impromptu expenses—like a tip for the kid delivering pizzas to the lunch meeting, or cab fare home for employees working late.
  • The petty cash custodian is charged with distributing the cash and collecting receipts for all purchases or any uses of the funds.

No other entry would be made until reimbursement is requested and supported by whatever documentation is needed; then, an entry like the following would be made to summarize all the petty cash transactions. Although it would be preferable if all disbursements were made by check and all receipts were deposited intact, most firms usually maintain a small amount of cash on hand for miscellaneous expenditures. Petty cash refers specifically to money—literally, coins and bills—that a company keeps on hand for small outlays, usually because using cash is easier than using a check or credit card. Establishing a dollar amount to meets your business’s petty cash needs is essential. Make sure your employees understand what the petty cash fund can or can’t be used for by creating a petty cash policy. As your business grows, you may need to re-evaluate the amount you keep in your petty cash fund.

What is a Petty Cash Fund?

A monitoring and tracking system, with receipts, should be used for the petty cash fund. Before going to the cashier, she should first complete the bottom of the petty cash log. The remaining $185 on hand is what’s left of the $500 petty cash fund after reimbursements. In the petty cash policy document, we should state that the petty cash fund is $500 with Heather Smith as the custodian.

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If an item exceeds that amount, companies deal with the reimbursement through other means. On top of that, they may also specify the areas or accounts that the petty cash can cover. When accounting for petty cash, companies must consider various factors. Essentially, it includes any insignificant amount of money held in the office for small expenses. Failure to properly safeguard, reconcile and administer petty cash funds may lead to revocation of the petty cash fund from the department and/or disciplinary action up to and including termination.

Petty cash do’s and don’ts

At the end of each accounting period, companies must close the balance on the petty cash account. They report this balance under amazon accounting the current asset section on the balance sheet. In most cases, companies include petty cash account balances under cash in hand.

Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount. You’ll also want to decide the replenishment point, which is where your expenses are recorded, and a new check is written to bring the petty cash total back to its original amount. For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15.

If you’re ready to set up a petty cash account for your business, we’ll guide you through the process. 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.

Establishing a petty cash fund

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. This person’s name will be listed as the payee on the company’s $100 check and will be accountable for the $100.

Occasionally, errors may occur that affect the balance of the petty cash account. This may be the result of an employee not getting a receipt or getting back incorrect change from the store where the purchase was made. In this case, an expense is created that creates a cash overage or shortage. When you put money into the fund, you must create a journal entry debiting your Petty Cash account and crediting your Cash account.