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

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. 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. Each time you tap into a petty cash fund—that is, take money out—a slip or voucher should be filled out. This acts as a receipt, logging the amount of the withdrawal, the date, the purpose, and other details.

• The check is cashed and the proceeds are placed in the petty cash box.
• In the event that all of the cash in the account is used before the end of the established time period, it can be replenished in the same way at any time more cash is needed.
• The check is cashed and the money is placed under the control of one designated individual.
• For example, a retailer will compare daily cash sales to the actual cash found in the cash register drawers.

Financial accountants (and independent auditors) are generally not concerned with petty cash because of the immateriality of the amounts. To accomplish the reimbursement, the treasurer’s office provides the requested amount (by check or currency) to the custodian. Get up and running with free payroll setup, and enjoy free expert support.

Reconcile and record petty cash expenses

To create a petty cash fund, a check is written to cash for a set amount such as $75 or $100. Petty cash funds are subject to theft, and so are commonly being replaced by corporate credit cards and employee expense report reimbursement systems. 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.

• When the petty cash fund gets too low, you must refill it to its set amount.
• To reconcile, you’ll need to match your receipts with the amounts recorded on the petty cash form.
• He completed a Bachelor of Science degree in Accountancy at Silliman University in Dumaguete City, Philippines.
• (Figure)Discuss the importance of a company having proper insurance and bonding its employees.

A petty cash voucher is a document or form that shows the amount of and reason for a petty cash disbursement. The English word „petty” derives from the French petit, which means „small” or „little.” Likewise, „petty” means minor or insignificant. So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills. By having a petty cash cashier and a petty cash custodian, the dual-process helps to keep the funds secure and ensure that only those authorized have access to it. Throughout the month, several payments are made from the petty cash account of the Galaxy’s Best Yogurt.

How is petty cash accounted for in an accounting system?

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. However, on corporate financial statements, petty cash is listed in the „Cash and cash equivalents” section of the balance sheet. While it shouldn’t be a habitual practice, petty cash in a pinch can be used to make change for customers, if the till’s running short.

Only when the fund is reimbursed, or when the end of the accounting period arrives, does the firm make an entry in the journal. 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.

Determine who will manage petty cash

If the remaining balance is more than what it should be, there is an overage. Although there can be minor variances, when unbalanced, the source of the discrepancy should be identified and corrected. The custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, and dispensing funds. Most businesses will reserve enough cash in their fund to meet their monthly needs. However, keeping too much cash could result in unused funds sitting in an account. In the upper right portion of the window, click the green New button to create a petty cash account.

At this time, the total of all of the receipts is calculated to ensure that it matches the disbursed funds from the petty cash drawer. If new funds are needed, the cashier writes a new check to fund the petty cash drawer and takes, in exchange, the receipts from the purchases that depleted the cash. 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. At this point, the petty cash box has $75 to be used for small expenses with the authorization of the responsible manager.

This voucher indicates the purpose of the expenditure, the date, and the name of the person receiving the cash. The custodian of the petty cash fund is in charge of approving and making all disbursements from the fund. Next, a company check is prepared and cashed for the amount the company believes will be best for the small payments it experiences. If the amount is $100, the company check will be coded to debit Petty Cash for $100 and to credit Cash for $100. Cash, in many cases, remains the quickest, simplest, easiest way to pay for things.

Journalizing Petty Cash 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. Petty cash accounts are managed through a series of journal entries. Entries are needed to (1) establish the fund, (2) increase or decrease the balance of the fund (replenish the fund as cash is used), and (3) adjust for overages and shortages of cash.

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. Cash is hard to secure and impossible to track; it’s very easy for bills to disappear without a trace—even if you’ve established a careful system of receipts or vouchers. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.

In the next section, we’ll look at one of the most important cash controls, the bank reconciliation process, in detail. For example, if there are un-reimbursed expenditures from petty cash at the end of the year, expenses are understated and cash overstated. 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). The custodian must create a petty cash voucher for all expenditures.

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Many bookkeepers prefer to combine the second and third journal entries above if the cash is replenished at the same time as expenses are recorded, which is generally the best practice. By combining the journal entries, Petty Cash isn’t adjusted and the expenses are recorded coming directly from the checking account. Whatever you decide, it’s important that only one person have access to the fund at any time, to avoid unaccounted for withdrawals and/or theft. Once you determine who will handle petty cash, you’re ready to cash a check and deposit the funds into the petty cash lockbox. If you’re ready to set up a petty cash fund for your office but aren’t sure where to begin, follow the simple steps below to have your petty cash fund operational in no time. To begin, have a secure place to store your petty cash funds, such as a lockbox or locked drawer.

Step 4: Reconcile Petty Cash Regularly

To start a petty cash fund, you need to create a petty cash account in the general ledger. This account is in addition to the firm’s other cash accounts, such as its checking account and savings account. The balances in all cash accounts are typically aggregated into a single line item in the balance revenue and expense year sheet, which is then reported within the current assets section of the report. When your petty cash cashier puts money into the petty cash fund, they must create a journal entry in your books. The entry must show an increase in your Petty Cash account and a decrease in your Cash account.