Journalizing Petty Cash Transactions Financial Accounting
Give the receipt to your finance department or the person who handles your small business books. A company, ABC Co., uses its petty cash account to deal with various transactions during an accounting period. Based on those transactions, the journal entry will also differ. Usually, companies use “petty cash” to denote this account in their books. While other activities may also affect it, they are a type of the above two items.
Example of a Petty Cash Reimbursement Journal Entry
It is crucial for companies as it helps them continue their operations smoothly. When the petty cash fund runs low, it needs to be replenished. Replenishing the petty cash involves adding money back into the fund and recording the transaction. In this guide, we’ll break down the basics of petty cash journal entries, how to record them accurately, and share some easy-to-follow examples to make it all simple.
We will not use the petty cash in a journal entry again unless we are changing this original amount. Most commonly, the petty cash fund should be reimbursed on a monthly basis. The amount is transferred at the beginning of the month to the custodian. He makes expenses from the petty cash fund during the whole month. The companies do not wait for the complete replenishment of the fund before it’s financed again.
Importance of Petty Cash in Business Operations
- Development of standard operating procedures on how, when, who, and how much, will be a good start for the petty cash management system.
- Remember, for all journal entries, total debits must equal total credits.
- You must debit your Postage, Meals and Entertainment, and Office Supplies accounts and credit your Petty Cash account.
- To determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure.
- If a petty cash fund is too large, it may be an indicator that transactions that should be paid by cheque are not being processed in accordance with company policy.
The Cash Short (Over) account is an income statement type account. For example, a retailer will compare daily cash sales to the actual cash found in the cash register drawers. After the check is cashed, the petty cash custodian normally places the money in a small box that can be locked.
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To illustrate, we will close the $100 original petty cash fund by returning the cash to the checking account with a debit to cash and a credit to petty cash. We have shared everything about petty cash funds, their management, and how and when to reimburse the petty cash fund for any company. We hope the information has helped you clearly understand the concept of petty cash funds. Let’s further elaborate on the process of petty cash fund reimbursement with the help of journal entries. Petty cash funds are cash funds maintained by businesses to cover small miscellaneous expenses. The journal entry is debiting expense $ 400 and credit cash on hand $ 400.
It usually involves recording two types of transactions, payments, and receipts. When accounting for petty cash, companies must record two types of transactions. Usually, these are the only items that impact the petty cash account.
- To show this, debit your Petty Cash account and credit your Cash account.
- Petty cash is used for buying supplies, postage, snacks for employees, and other small business expenses.
- When your petty cash cashier puts money into the petty cash fund, they must create a journal entry in your books.
- When a disbursement is made from the fund, a receipt should be placed in the petty cash box.
- While other activities may also affect it, they are a type of the above two items.
How to Replenish a Petty Cash Fund Journal Entry
The accounting for petty cash is straightforward once the source of the transaction is determined. Therefore, companies use the petty cash system to handle funds. However, keeping significant amounts of money at hand can have some risks. Petty cash is system companies create to hold insignificant amounts of funds.
Such payments are generally handled by a petty cash imprest system whereby an amount of ‘Float’ is fixed. This is the maximum amount of cash that can be held at any time. Each time cash level runs low, the petty cash imprest is injected with cash by drawing a cheque. The amount of reimbursement is equal to the expenses paid through petty cash since the time of last reimbursement. Petty cash balance after reimbursement reverts to back to the level of the float. Policies should be established regarding appropriate expenditures that can be paid from petty cash.
Petty cash refers to a system of holding insignificant sums of funds to pay for minor expenses. Companies use this system to keep money at hand to meet small needs as they arise. Most companies specify the amount of money the petty cashier can allocate to a specific payment. If an item exceeds that amount, companies deal with the reimbursement through other means. On top of that, they may also specify the areas or accounts that the petty cash can cover.
This journal entry, in essence, subdivides the petty cash portion of available funds into a separate account. Development of standard operating procedures on how, when, who, petty cash reimbursement journal entry and how much, will be a good start for the petty cash management system. Also, develop SOPs related to budget and reconciliation of the petty cash funds kept within the organization. Custodian, reimbursement procedure, issuance procedure, recording, and recognition for financial purposes also come under Standard Operating Procedures’ scope.
Occasional errors may cause the petty cash fund to be out of balance. The sum of the cash and receipts will differ from the correct Petty Cash balance. This might be the result of simple mistakes, such as math errors in making change, or perhaps someone failed to provide a receipt for an appropriate expenditure.
Accounting for Petty Cash
Not rigorous, but budgeting is required for petty cash funds like any other item or account of the business entity. It can be done by studying past patterns and cash expenses help in setting an appropriate limit of cash balance in the company. The budgeting process includes setting a limit for monthly petty cash funds necessary for the company’s contingencies. Remember, for all journal entries, total debits must equal total credits. One of the conveniences of the petty cash fund is that payments from the fund require no journal entries at the time of payment. Thus, using a petty cash fund avoids the need for making many entries for small amounts.
A cheque is then issued to reimburse the petty cash fund for the total amount of the receipts. At any given time, the petty cash amount should consist of cash and supporting receipts, all totalling the petty cash fund amount. To demonstrate the management of a petty cash fund, assume that a $200 cheque is issued for the purpose of establishing a petty cash fund. 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).
Without a petty cash system, using small cash amounts periodically can add up to a major discrepancy in your books. And when you maintain records of all your business’s expenses, you can claim tax deductions. On the other hand, they also put cash into this system through their bank account.