How To Do Petty Cash Accounting & Recording in 6 Steps

By the end of the month, the petty cash custodian, Mary, finds that the petty cash fund has been reduced to $50. Many of your business expenses are tax deductible, including purchases made with your petty cash fund. For example, employees cannot use petty cash to buy themselves coffee. 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. For example, you might send an employee to pick up office supplies, like staples or printer paper.

If you are reimbursed $20 for postage expenses, debit postage expense $20 and credit cash $20. Small payments are often needed for postage, delivery charges, office supplies, or entertainment expenses. A petty cash fund provides an efficient way of handling these payments. As a company grows, it may find a need to increase the base size of its petty cash fund.

However, when there is a petty cash outflow, we usually do not record it into the accounting record immediately. Credit cash and write your next petty cash check for the combined total of the money taken from petty cash, $81.27. $81.27 plus the $18.73 already in the lock box restores petty cash to $100. Since most petty cash purchases are for business expenses, you will likely be able to deduct them from your business’s taxes at year-end.

Right after this entry has been recorded, the check cashed, and the proceeds put in the box, there will be $100 in the box again, an amount which will match the general ledger account. 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. Having a petty cash account is  just more convenient than going to the accounts payable clerk every time someone needs a stamp or a liter of coffee for a meeting.

  1. The balance in the petty cash account is now $300, which is where it was originally authorized to be.
  2. The next step is to enter both an expense and an asset account on your books under “petty cash”.
  3. Using a cash count sheet can be used to document the cash count, but it’s optional.
  4. For example, a retailer will compare daily cash sales to the actual cash found in the cash register drawers.

When the petty cash fund gets too low, you must refill it to its set amount. Then, create another journal entry debiting the Petty Cash account and crediting the Cash account. After posting to the ledger (we’ll use T accounts here), the checking account balance will go down by $100 and the petty cash balance will go up by $100. Then, get the total of the Amount column to determine total petty cash expenses. The ending balance is the difference between the beginning balance and the total petty cash expenses. The currencies inside the lockbox should be equal to the ending balance.

What is the approximate value of your cash savings and other investments?

To combat this, make sure your employees understand upfront what petty cash can and can’t be spent on. A petty cash fund is a small fund whose purpose is to make small disbursements of cash. The cash over and short is usually recorded under the other revenues or other expenses on the income statement as its amount is usually very small.

He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. To accomplish the reimbursement, the treasurer’s office provides the requested amount (by check or currency) to the custodian. Verify that the fund in the Total Petty Cash Fund Balance row equals the Allocated Account Amount.

There is no journal entry at this point; instead, the cash balance in the petty cash fund continues to decline, while the number of receipts continues to increase. 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. Likewise, we can make the journal entry for petty cash replenishment with the cash overage by debiting the expenses accounts and crediting the cash over and short account and the cash account. This is to ease the process of recording the accounting transactions and this usually works very well as long as there is proper petty cash control in place (e.g. dual signatures).

Step 3: Reimburse Receipts and Record Expense in the Petty Cash Log

When the fund is replenished, the credit to Cash is for the difference between the established amount and the actual cash in the fund. 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. Petty cash refers to a small amount of money, including bills and coins, kept on hand for employees to make small purchases that don’t require a company credit card or check. These purchases typically involve minor expenses such as office supplies, snacks, flowers, catered lunches, and small reimbursements. Due to the involvement of actual cash, it is crucial for businesses to carefully oversee the utilization of these funds.

Why Is It Called Petty Cash?

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. When you put money into the fund, you must create a journal entry debiting your Petty Cash account and crediting your Cash account.

The balance in the petty cash account should now be the same as the amount at which it started. If you plan to use petty cash for small business purchases like postage and office supplies, it may be handy to use the petty cash log to keep track of your transactions. Keeping careful records of cash expenditures will be a huge help when it comes time to reconcile your petty cash account. However, using accounting software, like QuickBooks Online, can make managing petty cash expenses easier and faster because it simplifies the recording of expenses.

Petty Cash: Definition

Petty cash can be a convenient way for businesses to handle small expenses, but it is important to keep track of all expenditures to avoid overspending. Petty cash is typically issued by a designated individual or department within a company, often referred to as the petty cash custodian. This person is responsible for managing and disbursing the petty cash funds for small, everyday expenses.

Finally, surprise petty cash counts should be made to maintain good internal control over the fund. Another entry to petty cash is not made unless the firm wants to increase or decrease the fund above or below $100. The total of the bill and coin entries is automatically calculated and displayed in the Summary – Total cash on hand section on the right portion of the Form. Arrange original receipts in chronological order (exclude any confidential subject information, if applicable) and by type.

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