When can you credit petty cash?

Companies normally use checks to pay their obligations because checks provide a record of each payment. Companies also maintain a petty cash fund to pay for small, miscellaneous expenditures such as stamps, small delivery charges, or emergency supplies. The size of a petty cash fund varies depending on the needs of the business. A petty cash fund should be small enough so that it does not unnecessarily tie up company assets or become a target for theft, but it should be large enough to lessen the inconvenience associated with frequently replenishing the fund. For this reason, companies typically establish a petty cash fund that needs to be replenished every two to four weeks.

Companies assign responsibility for the petty cash fund to a person called the petty cash custodian or petty cashier. To establish a petty cash fund, someone must write a check to the petty cash custodian, who cashes the check and keeps the money in a locked file or cash box. The journal entry to record the creation of a petty cash fund appears below.

When can you credit petty cash?

Most companies would record this entry—or any other entry that credits cash—in the cash disbursements special journal, but the illustrations use the general journal to eliminate journal columns that are not relevant to this discussion and to conform with this subject's presentation in most textbooks.

Whenever someone in the company requests petty cash, the petty cash custodian prepares a voucher that identifies the date, amount, recipient, and reason for the cash disbursement. For control purposes, vouchers are sequentially prenumbered and signed by both the person requesting the cash and the custodian. After the cash is spent, receipts or other relevant documents should be returned to the petty cash custodian, who attaches them to the voucher. All vouchers are kept with the petty cash fund until the fund is replenished, so the total amount of the vouchers and the remaining cash in the fund should always equal the amount assigned to the fund.

When the fund requires more cash or at the end of an accounting period, the petty cash custodian requests a check for the difference between the cash on hand and the total assigned to the fund. At this time, the person who provides cash to the custodian should examine the vouchers to verify their legitimacy. The transaction that replenishes the petty cash fund is recorded with a compound entry that debits all relevant asset or expense accounts and credits cash. Consider the journal entry below, which is made after the custodian requests $130 to replenish the petty cash fund and submits vouchers that fall into one of three categories.

When can you credit petty cash?

Notice that the petty cash account is debited or credited only when the fund is established or when the size of the fund is increased or decreased, not when the fund is replenished.

If the voucher amounts do not equal the cash needed to replenish the fund, the difference is recorded in an account named cash over and short. This account is debited when there is a cash shortage and credited when there is a cash overage. Cash over and short appears on the income statement as a miscellaneous expense if the account has a debit balance or as a miscellaneous revenue if the account has a credit balance. In the journal entry below, the vouchers total $130 but the fund needs $135, so the entry includes a $5 debit to the cash over and short account.

When can you credit petty cash?

If the vouchers total $130 but the fund needs only $125, the journal entry includes a $5 credit to the cash over and short account.

Your postage machine just stopped working, and you need to send one of your employees to the post office fast to get some stamps. The only problem is she has no cash and her credit card is maxed out.

That’s where petty cash comes in. Petty cash is the money you keep on hand in your business to pay for small expenses such as emergency trips to the post office, beverages for unexpected visitors, or to reimburse your receptionist for picking up donuts for the staff meeting this morning.

Most small businesses keep between $100 and $200 in petty cash to pay for these and other unexpected expenses. If you’re ready to set up a petty cash account for your business, we’ll guide you through the process.

Overview: What is petty cash?

Petty cash is the money a business keeps on hand to pay for miscellaneous purchases. Most purchases made with petty cash are unexpected expenses that can pop up, such as morning coffee for a meeting or dinner for an employee working overtime.

One of the main reasons to have petty cash on hand is to quickly reimburse employees who have spent their own money on items for the business or to tip the delivery service driver who brought the office lunch.

Petty cash, like any other expenditure, needs to be accounted for properly in your accounting software or manual accounting system since the expenses are business related and need to be properly recorded to ensure financial statement accuracy.

An example of petty cash

On her way to the office, Jane receives a phone call from her boss asking her to stop and pick up some donuts for an unexpected meeting later that morning. Jane doesn’t have a credit card and has only $25 to last her until she gets paid.

Jane stops to pick up two boxes of donuts, leaving her with $5 in her wallet. Fortunately, her office has a petty cash fund, which her boss immediately reimburses her from, so Jane doesn’t have to submit an expense report and wait for weeks to be reimbursed.

Petty cash is typically spent on:

  • Coffee and other beverages
  • Office snacks such as fruit and pastries
  • Gas
  • Emergency office supplies
  • Employee reimbursements

How to set up and use petty cash in your business

If you’re ready to set up a petty cash fund for your office but aren’t sure where to begin, follow the simple steps below to have your petty cash fund operational in no time. To begin, have a secure place to store your petty cash funds, such as a lockbox or locked drawer.

1. Set account limits

Before you start a petty cash fund, you’ll need to decide how much you want the fund to be. Between $100 and $200 is fairly common, though you can go lower or higher, depending on your business.

You’ll also want to decide the replenishment point, which is where your expenses are recorded, and a new check is written to bring the petty cash total back to its original amount. For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15.

2. Determine who will manage petty cash

If you have an office manager, they’re the most likely choice to manage the petty cash fund. If you only have a few employees, fund management may fall to you.

Whatever you decide, it’s important that only one person have access to the fund at any time, to avoid unaccounted for withdrawals and/or theft. Once you determine who will handle petty cash, you’re ready to cash a check and deposit the funds into the petty cash lockbox.

3. Create a log

The petty cash log is one of the most important components of managing petty cash. Any transactions made into or out of petty cash need to be recorded on the petty cash log. It’s also important that any money disbursed out of the petty cash fund have a receipt.

For example, for Jane to get reimbursed for the donuts she purchased for the meeting, she needs to provide a receipt. The receipt will be used later as back up for recording the petty cash transaction as an expense in your general ledger.

DateDetailsCash InCash OutBalance8-3-2020Postage$7.25$92.75

The petty cash log should include the date, details of the transaction, the cash you put into petty cash, the amount distributed, and a running balance. Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount.

4. Reconcile and record petty cash expenses

When your petty cash fund starts to run dry, it’s time to record the expenses and reimburse the fund. To reconcile, you’ll need to match your receipts with the amounts recorded on the petty cash form.

Your available cash should always match the amount recorded in your petty cash log. If it doesn’t, you’ll need to account for any cash over and short. Once the account is reconciled, you’re ready to record your expenses into your general ledger.

DateDetailsCash InCash OutBalance8-1-2020Petty Cash$100.00$100.008-3-2020Postage$  7.25$  92.758-9-2020Donuts for meeting$12.25$  80.508-15-2020Gas$10.50$  70.008-21-2020Office supplies$25.00$  45.008-23-2020Postage$18.25$  26.758-25-2020Coffee for meeting$11.25$  15.50

To record the petty cash transactions for August, you would need to record the expenses as a journal entry.

DateAccountDebitCredit8-25-2020Postage$27.50Gas10.50Office Supplies23.00Food and Beverage23.50Bank Account$84.50

5. Reassess the petty cash fund periodically

If you find yourself going through petty cash rapidly, you can increase the amount of petty cash you keep on hand. Also, take a few minutes to see what you’re spending petty cash on.

For example, if you’re always buying coffee for the office, it might be a good idea to purchase coffee out of your regular funds, rather than depleting petty cash to purchase coffee every Monday for the staff meeting.

Petty cash can be a useful tool if managed properly

If you decide to set up a petty cash fund for your small business, there are a few things you can do to ensure that it runs smoothly, such as creating a petty cash policy that outlines what petty cash can be used for as well as any maximum spending amounts.

For example, you don’t want to use petty cash for high priced expenses, so it can help to set a dollar limit, such as $25.00. Anything over that amount would be paid for or reimbursed using other means. Making sure that any expense you reimburse has a receipt is also helpful.

While a petty cash fund may not be necessary if you work solo, if you have even one employee, it may be worth it to set up a petty cash fund to manage those unexpected expenses properly.

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When should you credit a petty cash account?

Notice that the petty cash account is debited or credited only when the fund is established or when the size of the fund is increased or decreased, not when the fund is replenished.

What causes a petty cash account to be credited?

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.

What are the rules for petty cash?

Petty cash funds are for the purpose of infrequent or emergency departmental purchases. All other purchases must go through the purchase order process via a requisition/request for payment. Under no circumstances can petty cash be used for personal expenses or loans.

Does petty cash get debited or credited?

The Petty Cash System The initial petty cash journal entry is a debit to the petty cash account and a credit to the cash account. The petty cash custodian then disburses petty cash from the fund in exchange for receipts related to whatever the expenditure may be.