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. The second journal entry is debiting petty cash and credit cash on hand (any cash account). You must document each expense if you want to deduct it from your business taxes. If you don’t document your petty cash purchases, you will not be able to deduct the expenses when you pay business taxes. Read on to learn about establishing a petty cash fund, handling petty cash accounting, reconciling your petty cash account, and claiming a tax deduction. Usually a custodian is appointed to administer the petty cash and it is his/her duty to account for the expenses incurred out of petty cash fund.
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Benefits of Maintaining Accurate Petty Cash Records
Company needs to record expenses on the income statement and increase the petty cash balance to $ 500. First of all, there is always the potential for theft or misappropriation of funds. If the petty cash is not properly secured, it could be easy for someone with ill intentions to take the money.
How do you record replenishment of petty cash?
(Sometimes we refer to this fund as an imprest fund since it is replenished when it becomes low.). 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. 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).
- Petty cash is a designated sum of money that is kept on hand for small, everyday expenses that may come up.
- Petty cash is the cash on hand that company puts in the safe box for small expenses that require immediate payment.
- When the petty cash fund runs low, you replenish it by writing a check or withdrawing cash from the bank to bring the fund back to its original amount.
- Proper management of petty cash through accurate journal entries helps maintain financial accuracy and transparency.
- Petty cash replenishment refers to the process of restoring the cash balance in the petty cash fund back to its original imprest amount.
Cash Short and Over
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. During the month, petty cash is used for various expenses totaling $ 370. During the month, the cashier will use the petty cash to settle the small expense. They only do not down the expense and attach it with the invoice. It is important to realize that the $80 check will be credited to Cash (the company’s checking account).
Recording Overages and Shortages
If receipts are not properly tracked and filed, it can be difficult to account for all of the expenses. This can lead to problems down the road, especially if an audit is conducted. 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. Like any other type of transaction, you must record petty cash transactions in your small business accounting books.
There is no entry to the Petty Cash account when merely replenishing the petty cash. Replenishing the petty cash involves adding money back into the fund and recording the transaction. No journal entry is made at the time of payment.The entries replenishing petty cash fund journal entry occur only when the fund is replenished. The custodian is responsible for safeguarding the money and maintaining petty cash vouchers or receipts for every disbursement.
Bookkeeping
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). 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. If the business decides to increase the petty cash fund, the excess amount is transferred to the petty cash account.
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. Let’s assume that a company has a petty cash fund of $100 and its general ledger account Petty Cash has a debit balance of $100.
- The custodian should prepare a voucher for each disbursement and staple any source documents (invoices, receipts, etc.) for expenditures to the petty cash voucher.
- It is important to realize that the $80 check will be credited to Cash (the company’s checking account).
- On May 20, 2024, your business spends $30 of the petty cash fund on miscellaneous items such as coffee for the office.
- Here is a video of the petty cash process and then we will review the steps in detail.
Since expenses are paid from petty cash funds, you keep receipts and record the expenses in the appropriate accounts. These expenses are usually recorded when the fund is replenished. 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.
If your cash is over or short, select the appropriate line to enter in the second bookkeeping entry. If you are balanced, you will not have a cash over/short in your journal entry.In QuickBooks®, the petty cash account would be setup as a BANK type not an other Current Asset type … Click here to see how to enter your petty cash vouchers into QuickBooks®. Managing a petty cash fund efficiently requires accurate petty cash journal entries and regular replenishment. By following best practices and keeping meticulous records, businesses can maintain financial transparency and streamline their minor expense processes.
Petty cash is a convenient alternative to writing checks for smaller transactions. 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.