Petty cash funds are useful alternatives to writing checks or using your business credit card to cover small expenses. Petty cash funds are used to purchase items for your business, reimburse employees who purchased business items, or to make change. A designated employee, the petty cash custodian, accounts for your business’s use of petty cash. When an employee takes money from the petty cash fund, the petty cash custodian must record who took the money, the amount taken, what the money is for, and the date. Read on to learn about establishing a petty cash fund, handling petty cash accounting, reconciling your petty cash account, and claiming a tax deduction. Next, let’s assume that there is only $20.00 in cash remaining and Mary realizes that $20 is not sufficient.
You must debit your Postage, Meals and Entertainment, and Office Supplies accounts and credit your Petty Cash account. An employee using petty cash should provide a receipt for the purchase to the petty cash custodian. Give the receipt to your finance department or the person who handles your small business books. For example, you might send an employee to pick up office supplies, like staples or printer paper. You would use your petty cash fund to reimburse your employee for the purchase of the supplies. No journal entry is made at the time of payment.The entries occur only when the fund is replenished.
Replenish Petty Cash Journal Entry
On May 20, 2024, your business spends $30 of the petty cash fund on miscellaneous items such as coffee for the office. Even when employees need to front their own business expenses out-of-pocket, mobile and online applications allow for prompt submission and reimbursement of expense reports. Even though a smaller petty cash float needs to be replenished more frequently, it is not advisable to leave excessive amounts of cash lying around the office. Most businesses will reserve enough cash in their fund to meet their monthly needs.
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.
Process: How Does Petty Cash Work?
However, keeping too much cash could result in unused funds sitting in an account. Assume your business establishes a petty cash fund with $500 on January 1, 2024. It should be noted that the debit to the income statement for the expenses, reduces the net income which reduces the retained earnings and therefore the equity in the business. Petty cash refers to physical cash kept on-site to handle low-value expenses that are impractical to pay by check or bank transfer.
Welcome to AccountingJournalEntries.com, your ultimate resource for mastering journal entries in accounting. Enhance your accounting skills and knowledge with our comprehensive resources tailored for professionals and students alike. Assume that on March 1, 2024, the business decides to decrease petty cash by $200, for a total decrease of $600. Assume that on February 1, 2024, the business decides to increase petty cash by $300, bringing the total to $800.
Financial Accounting
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. Sometimes, the company decides to combine the transactions above without touching the petty cash account. The transaction will end up impacting the expense account and cash-on-hand account.
How large are petty cash funds?
- Your petty cash custodian should be the only employee distributing petty cash.
- If the business decides to increase the petty cash fund, the excess amount is transferred to the petty cash account.
- The process includes a set of rules, policies, form templates, procedures and controls that a company uses to manage its petty cash fund.
- If you don’t document your petty cash purchases, you will not be able to deduct the expenses when you pay business taxes.
- Many of your business expenses are tax deductible, including purchases made with your petty cash fund.
You must record petty cash transactions, even if you think they’re too low to matter. Without a petty cash system, using small cash amounts periodically can add up to a major discrepancy in your books. And when you maintain records of all your business’s expenses, you can claim tax deductions. 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 paid cash to replenish the petty cash fund the fund less the total vouchers.
Petty cash accounting
The replenish will move the cash from other accounts to the petty cash account. At the same time, it records the amount of petty cash that is used to pay for small expenses. A petty cash custodian should be designated to safeguard and make payments from this fund. At the time the fund is established, the following journal entry is needed.
- This journal entry, in essence, subdivides the petty cash portion of available funds into a separate account.
- On June 10, 2024, your business used $75 from the petty cash fund to pay for minor repairs to office equipment.
- Enhance your accounting skills and knowledge with our comprehensive resources tailored for professionals and students alike.
- Frank, who is the responsible person, has been filling out the voucher during the month, and all the receipts are stapled to the voucher.
- Most digital and mobile wallets can be connected to a company card, which means that we do not have to carry around a piece of plastic all the time.
- The company needs to replenish the petty cash so that it will increase to a maximum level.
Company needs to record expenses on the income statement and increase the petty cash balance to $ 500. The first journal entry is debiting expense (small expense) and credit petty cash. As a company grows, it may find a need to increase the base size of its petty cash fund.
For these reasons, it is important to weigh the risks and benefits of using company petty cash before making a decision. It should be noted that there is no entry made to the petty cash fund. With an imprest system the balance on the fund (cash + vouchers) is always constant (300).
If the business decides to increase the petty cash fund, the excess amount is transferred to the petty cash account. The journal entry is debiting expense $ 400 and credit cash on hand $ 400. The journal entry is debiting expense $ 400 and credit petty cash $ 400.
The entry to increase the fund would be identical to the first entry illustrated; that is, the amount added to the base amount of the fund would be debited to Petty Cash and credited to Cash. Otherwise, take note that the only entry to the Petty Cash account occurred when the fund was established. For example, employees cannot use petty cash to buy themselves coffee. Your petty cash custodian should be the only employee distributing petty cash. Your petty cash custodian determines if the expense is appropriate according to your business’s petty cash policy.Petty cash is considered a highly liquid asset. Consider keeping your petty cash locked in a drawer, safe, or filing cabinet.
Regardless of the cause, the fund needs to be topped up back to the float level. After making the purchase, the employee returns with the receipt and any spare change to exchange it back for the IOU. Most digital and mobile wallets can be connected to a company card, which means that we do not have to carry around a piece of plastic all the time. This includes credit, debit, prepaid, procurement, purchasing and other types of cards. The tax authorities can provide you with the relevant information applicable to your specific circumstances, such as the IRS Publication 583 in the United States.
The custodian and the business owner, CFO or Financial Controller should be the only individuals who have the key to the container. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
Example: Recording Petty Cash Expenses
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. To show this, debit your Petty Cash account and credit your Cash account. Before establishing a petty cash fund at your small business, be prepared to create a petty cash accounting system. Petty cash is a small amount of money kept on hand to cover small expenses such as office supplies or minor repairs. A petty cash fund is established with a fixed amount and is replenished periodically as it is used.
The accounting records will show the following bookkeeping entries when the business withdraws cash to replenish the petty cash fund. 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. If a surplus or shortage is discovered, the difference will be recorded in Cash Short (Over); a debit balance indicates a shortage (expense), while a credit represents an overage (revenue). 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.