When small incidental expenses are incurred, businesses will often use cash as a means of payment. The petty cash account is usually used for these small cash payments. Petty cash may also be used when writing a check isn’t practical. Just like any other business transaction, this account has specific procedures that should be followed.
Starting a Petty Cash Fund
The first step to starting a petty cash fund is to determine the actual dollar amount of the fund. Once the amount is determined a company check is written for the predetermined amount. For illustration purposes we’ll use $500. The check is then cashed and the cash should be placed in a secure lock box. The actual journal entry for starting the fund would be as follows.
- Petty Cash $500 - Debit (increase)
- Cash $500 - Credit (decrease)
For accountability reasons, it’s always a good idea to limit access to the actual lock box to only one person. Another person should also be designated as a back up in case the primary person is absent. Before the back up person takes control of the lock box, the money should be counted and verified by another person, preferably a manager.
Petty Cash Voucher Slips
As a means of disbursing the needed cash for small purchases, a petty cash voucher should be created. The voucher is used to record certain information, as well as verification of the person requesting the cash. The voucher can be a simple form made in house. Some of the basic information that should be included on the voucher may include:
- Date
- Amount
- Expense Account
- Supplier or Vendor Name
- Signature.
The voucher should be placed in the lock box once the cash is given out. Once the purchase is made, a receipt should then be attached to the voucher and placed back in the lock box.
Expense Recording and Petty Cash Replenishment
At some point the petty cash will decrease to a point that it needs to be replenished. At the time of cash replenishment, the expenses are simultaneously recorded to the general journal. The total sum of the voucher/receipts and remaining cash should equal the original petty cash fund (i.e. $500). The following is an example of the affect on the general ledger accounts.
- Office Supplies $75 – Debit (increase)
- Entertainment $50 – Debit (increase)
- Vehicle Maintenance $75 – Debit (increase)
- Miscellaneous Expense $100 – Debit (increase)
- Petty Cash $300 – Credit (decrease)
Notice that the total debits and credits equal $300. Since the petty cash find started with $500, there should be $200 left in the lock box before the replenishment occurred. A check would then be made out for the $300. Once the check is created, the above general ledger accounts would be posted to the journal.. The check is then cashed and the $300 is put back into the petty cash lock box.
On occasion the fund could have an overage or shortage. In this case a journal entry should be made to an overage/shortage cash general ledger account. This will ensure that all the entries balance. An overage would be recorded as a credit and a shortage as a debit. The overage/shortage GL accounts would be considered an expense and would be reported on the company’s income statement.
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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