Petty Cash: Videos & Practice Problems

Petty cash is a small cash fund used for minor expenses, allowing companies to avoid frequent journal entries for trivial purchases. To establish a petty cash fund, a custodian is appointed, and a journal entry debits petty cash while crediting cash. When replenishing the fund, expenses are recorded as debits, and the cash account is credited. Discrepancies in petty cash are managed using a cash over and short account, which reflects minor gains or losses. This system enhances internal control and simplifies tracking of small expenditures.

Petty Cash:Establishing the Fund and Using the Fund

In a business setting, managing small, incidental expenses efficiently is crucial. These expenses, often referred to as trivial or miscellaneous, can include items like office supplies or delivery fees. To streamline the process of handling these minor costs, companies utilize a petty cash fund, which is a small cash reserve set aside for such purposes.

Establishing a petty cash fund begins with the appointment of a custodian, an individual responsible for managing the fund. For instance, a company might designate an office manager, such as Alvaro, to oversee the petty cash, providing him with an initial amount, say $100. The establishment of this fund requires a single journal entry: the company debits the petty cash account (an asset) and credits the cash account (reflecting a decrease in the bank account). This transaction can be represented as:

$$\text{Debit: Petty Cash} \quad 100$$

$$\text{Credit: Cash} \quad 100$$

This entry indicates that while the petty cash account increases by $100, the regular cash account decreases by the same amount, maintaining the overall asset balance.

Once the petty cash fund is established, the custodian can use it to pay for various small expenses without needing to make frequent journal entries for each transaction. Instead, the custodian must keep track of all expenditures by retaining vendor receipts and using pre-numbered petty cash vouchers. This internal control system helps prevent misuse of the funds and ensures accountability. For example, if Alvaro uses petty cash to pay for a delivery fee, he will document the transaction with a receipt and a voucher.

Importantly, no journal entries are recorded for each petty cash purchase. Instead, journal entries are only made when the fund needs to be replenished. This approach simplifies record-keeping and allows for efficient management of minor expenses, ensuring that the petty cash fund remains organized and accountable.

Petty Cash:Replenishing the Fund

When managing a petty cash fund, it's essential to monitor the balance regularly to ensure it remains adequately funded. In this scenario, Alvaro discovers that the petty cash fund has dwindled to $10 or $12. To address this, he submits a request for an $84 check to replenish the fund. This process involves reviewing receipts for expenses incurred, which in this case total $84, broken down into $42 for postage, $18 for supplies, and $24 for deliveries.

In accounting terms, these expenses are recorded as debits in the journal. Specifically, Alvaro will debit the postage expense account for $42, the supplies expense account for $18, and the delivery expense account for $24. This reflects the increase in expenses associated with these transactions. It's important to note that these entries are made after the purchases have been made, as petty cash transactions are often recorded in batches rather than individually.

To replenish the petty cash fund, instead of crediting the petty cash account, which remains at its original balance of $100, Alvaro will credit the cash account for the $84 being disbursed. This approach simplifies the process, as it avoids multiple entries for taking money out of petty cash and then putting it back in. After receiving the $84, the petty cash fund is restored to its intended balance of $100, with Alvaro having spent $84 and leaving $16 in the box.

In summary, the replenishment of the petty cash fund involves debiting the relevant expense accounts to reflect the costs incurred and crediting the cash account to account for the funds provided to Alvaro. This method ensures that the petty cash fund remains balanced and accurately reflects the company's expenses without complicating the accounting entries.

Petty Cash:Cash Over and Short

In managing petty cash transactions, discrepancies can arise, such as when the total expenses do not match the cash available. For instance, if Alvaro has $17 left in his petty cash fund and requests an $83 check to replenish it, we need to analyze the situation carefully. His receipts total $84, comprising $42 for postage, $18 for supplies, and $24 for deliveries. However, since he only requested $83, there is a $1 discrepancy that needs to be addressed.

This discrepancy is recorded in a special account known as cash over and short. This account is used to track small differences in petty cash. If there is a shortage, it indicates a loss, while an excess indicates a gain. In this case, the $1 surplus is treated as a credit in the cash over and short account, reflecting a miscellaneous gain.

To properly record the transactions, we start with the expenses: $42 for postage, $18 for supplies, and $24 for deliveries, totaling $84. The cash account is credited with $83, which is the amount withdrawn to replenish the petty cash fund. To balance the journal entry, we need to account for the $1 surplus, which is recorded as a credit in the cash over and short account.

The journal entry will look like this: the total expenses of $84 are debited, the cash account is credited by $83, and the cash over and short account is credited by $1. This ensures that the accounting equation remains balanced, with total debits equaling total credits.

In summary, when managing petty cash, it is crucial to accurately record all expenses and address any discrepancies using the cash over and short account. This account can either reflect a credit for excess cash or a debit for shortages, helping maintain accurate financial records.

Here’s what students ask on this topic:

What is petty cash and why is it used in businesses?

Petty cash is a small cash fund that businesses use to pay for minor, everyday expenses such as office supplies, postage, or small delivery fees. The primary purpose of petty cash is to avoid the need for frequent journal entries for trivial purchases, which simplifies accounting processes. By having a petty cash fund, companies can quickly and efficiently handle small expenditures without disrupting their main cash accounts. This system also helps in maintaining better internal control and tracking of minor expenses.

How do you establish a petty cash fund in accounting?

To establish a petty cash fund, a company appoints a custodian who will manage the fund. The company then makes a journal entry to debit the petty cash account and credit the main cash account. For example, if the company decides to set up a $100 petty cash fund, the journal entry would be: Debit Petty Cash $100, Credit Cash $100. This transfers the money from the main cash account to the petty cash fund, which the custodian will use for minor expenses.

What is the process for replenishing a petty cash fund?

When the petty cash fund is running low, the custodian submits a request to replenish it. The custodian provides receipts for the expenses incurred. A journal entry is then made to record these expenses and replenish the fund. For example, if $84 was spent on various expenses, the entry would be: Debit Postage Expense $42, Debit Supplies Expense $18, Debit Delivery Expense $24, Credit Cash $84. The company then issues a check to bring the petty cash fund back to its original amount.

How are discrepancies in petty cash handled?

Discrepancies in petty cash are managed using a 'Cash Over and Short' account. If the petty cash fund does not match the receipts, the difference is recorded in this account. For example, if the expenses total $84 but only $83 is needed to replenish the fund, the entry would be: Debit Postage Expense $42, Debit Supplies Expense $18, Debit Delivery Expense $24, Credit Cash $83, Credit Cash Over and Short $1. This account helps track minor gains or losses in the petty cash fund.

What are the internal controls associated with petty cash?

Internal controls for petty cash include appointing a custodian, using pre-numbered petty cash vouchers, and keeping detailed receipts for all expenditures. The custodian is responsible for managing the fund and ensuring that all transactions are documented. Pre-numbered vouchers help prevent unauthorized use of petty cash, and receipts provide a record of how the money was spent. These controls help maintain accountability and prevent misuse of the petty cash fund.