Petty Cash Accounting: Journal Entries Reconciling Accounts
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. After the owner or bookkeeper records all expenses https://www.quick-bookkeeping.net/how-to-write-off-a-bad-debt/ in the books, cash must be taken from the checking account to replenish the petty cash box. Record the transfer of cash by debiting Petty Cash and crediting Checking Account. The custodian should prepare a voucher for each disbursement and staple any source documents (invoices, receipts, etc.) for expenditures to the petty cash voucher.
- To create a petty cash fund, a check is written to cash for a set amount such as $75 or $100.
- With a petty cash fund in place, you can pay for small expenses like postage stamps, office supplies, office food and drinks, fuel expenses, parking tickets, and other unpredictable expenses.
- If you don’t document your petty cash purchases, you will not be able to deduct the expenses when you pay business taxes.
- To mitigate the risk of theft, fraud, and other errors in a petty cash system, implementing strong internal controls is crucial.
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As we have discussed, one of the hardest assets to control within any organization is cash. One way to control cash is for an organization to require that all payments be made by check. However, there are situations in which it is not practical to use a check.
Fact Checked
Our policy states that petty cash reimbursements shouldn’t exceed 10% of the fund balance. However, we can also specify that certain expenses are always chargeable to petty cash, even if they’re above $50. 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. 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.
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. If the balance in the petty cash account issupposed to be $75, then the petty cash box should contain $45 insigned receipts and $30 in cash. Assume that when the box iscounted, there are $45 in receipts and $25 in cash. This createsa $5 shortage that needs to be replaced from the checking account.The entry to record a cash shortage is as follows. As this petty cash fund is established, the account titled“Petty Cash” is created; this is an asset on the balance sheet ofmany small businesses.
Cash versus Debit Card
A pettycash fund is a type of imprest account, whichmeans that it contains a fixed amount of cash that is replaced asit is spent in order to maintain a set balance. When there is a shortage of cash, we record the shortage as a “debit” and this has the same effect as an expense. If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are recording revenue. If there were cash overage, the petty cash account would be debited and the cash over and short account would be credited. In this case, the expense balance decreases, and the year-end balance is the net balance from all overages and shortages during the year.
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 improve the way you handle petty cash accounting, require a petty cash receipt for each transaction. And, create a petty cash slip indicating the amount, employee’s name, and date when you give employees petty cash. When you or employees pay with petty cash, retain the receipt and attach the petty cash slip to the receipt for your records.
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. As cash is spent from a petty cash fund, it is replaced with a receipt of the purchase. At all times, the balance in the petty cash box should be equal to the cash in the box plus the receipts showing purchases. Heather needs a $315 reimbursement to bring the petty cash balance back to $500. Note that the entry to record replenishing the fund does not credit the Petty Cash account.
In the balance sheet, petty cash is considered a current asset, as it is expected to be used within a short period of time. The ending balance of the petty cash account should be reported under the “current assets” section. Another strategy is ensuring that petty cash disbursements are made for legitimate purposes, with proper documentation and approval. It is essential to maintain accurate records, as this makes it easier to trace any discrepancies. Proper documentation, like receipts and vouchers, should be required for all disbursements to create a permanent record and establish transparency.
You (or your petty cash cashier) must also create journal entries showing what petty cash funds go toward. Like any other type of transaction, you must record petty cash transactions in your small business accounting books. Read on to learn about establishing a petty cash fund, handling petty cash accounting, reconciling your petty cash account, and claiming a tax deduction. The cash flow statement reports on the movement of cash between the various accounts, including petty cash. Petty cash reporting is an essential process in maintaining an accurate and up-to-date record of a company’s financial transactions.
And when you maintain records of all your business’s expenses, you can claim tax deductions. A designated employee, known as the custodian, is responsible for managing and safeguarding this fund. Establishing a clear petty cash policy helps set the purpose and use of the petty cash fund, and lists allowable expenses. Every month, or as cash is turbotax review needed, the custodian should summarize the petty cash log by expense account and record a journal entry debiting each expense and crediting petty cash. With a petty cash fund in place, you can pay for small expenses like postage stamps, office supplies, office food and drinks, fuel expenses, parking tickets, and other unpredictable expenses.
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Periodic audits and independent reviews of petty cash transactions can further enhance the monitoring process. However, the petty cash custodian may perform weekly or daily reconciliation to keep track of the fund balance. Using a cash count sheet can be used to document the cash count, but it’s optional.
Such software not only simplifies bookkeeping but also reduces the risk of human errors. In conclusion, accurate and timely petty cash reporting is essential for maintaining up-to-date books and ensuring all transactions are properly accounted for in the company’s financial statements. By maintaining a clear and organized petty cash system, businesses can effectively manage small expenses and employee reimbursements, ensuring that necessary funds are readily available. To mitigate the risk of theft, fraud, and other errors in a petty cash system, implementing strong internal controls is crucial. One effective method is segregating duties, which involves assigning different tasks, such as disbursing cash and reconciling balances, to separate individuals. This way, it becomes more difficult for a single person to commit fraud without being detected.