Petty Cash

Petty cash funds

At times, every business finds it convenient to have small amounts of cash available for immediate payment of items such as delivery charges, postage stamps, taxi fares, supper money for employees working overtime, and other small items. 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.  The petty cash account is a current asset and will have a normal debit balance (debit to increase and credit to decrease).  Here is a video of the petty cash process and then we will review the steps in detail.

Usually one individual, called the petty cash custodian or cashier, is responsible for the control of the petty cash fund and documenting the disbursements made from the fund. By assigning the responsibility for the fund to one individual, the company has internal control over the cash in the fund.

A business establishes a petty cash fund by writing a check for, say, $100. It is payable to the petty cash custodian. The petty cash fund should be large enough to make disbursements for a reasonable period, such as a month. The following entry records this transaction as follows:

Debit Credit
Petty Cash 100
   Cash 100
To establish a petty cash fund.  

After the check is cashed, the petty cash custodian normally places the money in a small box that can be locked. The fund is now ready to be disbursed as needed.  We will not use the petty cash in a journal entry again unless we are changing this original amount.

One of the conveniences of the petty cash fund is that payments from the fund require no journal entries at the time of payment. Thus, using a petty cash fund avoids the need for making many entries for small amounts. Only when the fund is reimbursed, or when the end of the accounting period arrives, does the firm make an entry in the journal.

When disbursing cash from the fund, the petty cash custodian prepares a petty cash voucher, which should be signed by the person receiving the funds. A petty cash voucher is a document or form that shows the amount of and reason for a petty cash disbursement.

PETTY CASH VOUCHERS   NO. 359
To Local Cartage, Inc. Date June 29
EXPLANATION ACCT NO. AMOUNT
Freight on parts sold 12000 $ 22.75
APPROVED BY     A.E.C.  RECEIVED BY  Ken Black

The custodian should prepare a voucher for each disbursement and staple any source documents (invoices, receipts, etc.) for expenditures to the petty cash voucher. 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.

Replenishing Petty Cash

Companies replenish the petty cash fund at the end of the accounting period, or sooner if it becomes low. The reason for replenishing the fund at the end of the accounting period is that no record of the fund expenditures is in the accounts until the check is written and a journal entry is made. (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.

For example, assume the $100 petty cash fund currently has a money balance of  $7.40. A summary of the vouchers shows payments of $22.75 for shipping to customers, $50.80 for stamps, and $19.05 for an advance to an employee; these payments total $92.60. After the vouchers have been examined and approved, a check is created for $92.60 which restores the cash in the fund to its $100 balance.  Petty cash is not used in the replenishment journal entry.   The journal entry to record replenishment is:

 Debit   Credit 
Delivery Expense 22.75
Postage Expense 50.80
Employee Advances 19.05
    Cash 92.60
    To replenish a petty cash fund.  

Note that the entry to record replenishing the fund does not credit the Petty Cash account. We make entries to the Petty Cash account only when the fund is established or when the amount of the fund is changed or when the fund is closed and we want to add back cash in exchange for the petty cash vouchers.  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.  But, that is not always the case.

Sometimes, the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users. These errors cause the cash in the fund to be more or less than the amount of the fund less the total vouchers. When the fund is replenished, the credit to Cash is for the difference between the established amount and the actual cash in the fund. We would debit all vouchered items. 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.

To illustrate, assume in the preceding example that the balance in the fund was only $6.10 instead of $7.40. Restoring the fund to $100 requires a check for $93.90 ($100 fund amount – petty cash remaining $6.10). Since the petty cash vouchers total only $92.60, the amounts do not agree and the fund is short $ 1.30 ($93.90 needed – $92.60 in vouchers). The entry for replenishment is:

  Debit     Credit 
Delivery Expense 22.75
Postage Expense 50.80
Receivable from Employees 19.05
Cash Short and Over 1.30
    Cash 93.90
    To replenish a petty cash fund.  

The Cash Over and Short account will be used to balance the entry when the cash needed to get back to the petty cash account does not match the total of petty cash vouchers.  Remember, for all journal entries, total debits must equal total credits.

Changing the Petty Cash Amount

If the petty cash custodian finds that the petty cash fund is larger than needed, the excess petty cash should be deposited in the company’s checking account. The required entry to record a decrease in the fund debits Cash and credits Petty Cash for the amount returned and deposited.  To illustrate, the entry to decrease the petty cash fund by $50 would be:

Debit Credit
Cash 50
   Petty Cash 50
To decrease the size of the petty cash fund by $50. 

On the other hand, a petty cash fund may be too small, requiring replenishment every few days. The entry to record an increase in the fund debits Petty Cash and credits Cash for the amount of the increase.  The entry to increase the petty cash fund by  $400 would be:

Debit Credit
Petty Cash 400
   Cash 400
To increase the size of the petty cash fund by $400.  

A company may feel it is time to close the petty cash fund.  To illustrate, we will close the $100 original petty cash fund by returning the cash to the checking account with a debit to cash and a credit to petty cash.

Debit Credit
Cash 100
   Petty Cash 100
To close the $100 petty cash fund.