Petty Cash - Online Tutor, Practice Problems & Exam Prep

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

Alright. So every now and then, the company is going to have to purchase miscellaneous items like supplies here and there or maybe pay some delivery expenses. Let's see how they'll handle these trivial expenses. So when they spend money on these trivial things, like I said, such as delivery or supplies, when I say supplies here, this isn't like the monthly order of supplies where they order a bunch of supplies. Maybe the printer's out of paper and they have to run to Staples or Office Depot and just grab a pack of paper. This is going to be what we do with petty cash. So petty cash, it's a small cash fund for paying these trivial expenses, okay?

So the idea here is that we don't want to be making journal entries all the time for, you know, maybe a $5 purchase here and there. So what we'll do is have this petty cash on hand. So to establish a petty cash fund, the first thing we need to do is for the company to appoint the custodian. So the company creates the petty cash fund by appointing a custodian. There's going to be somebody in charge of the petty cash and they're going to give them the money. They're just going to take the money and give it to them. Like in our example here. So Clutch Prep appoints Alvaro, the office manager, to be in charge of the new petty cash fund, giving him $100.

So to establish the petty cash fund, we're going to make one journal entry here and this is going to be to debit petty cash. So this is kind of like a subsection of cash. We have this separate bit of cash in the petty cash fund. So notice it's a debit because petty cash is still an asset, right? This is still the company's money. So we're going to debit it because it's an asset, and we're going to take it out of our regular cash. So we're going to credit cash. So it's coming out of our bank account, and now it's going to be in Alvaro's hands. So we're going to debit petty cash for a $100, credit cash for $100. Nothing too crazy there, right? So we just literally move this cash out of the bank account into Alvaro's basically pocket to hold for us. So notice, nothing really happens here with our assets. We have a $100 increase to petty cash and our regular cash account, like our bank account, goes down by $100.

So what you'll notice is that Alvaro is going to have this money and he's going to be spending it. He's in charge of the office manager. UPS comes and charges us a delivery fee for something. Well, he's going to take money out of the petty cash to pay for that. So throughout the period, we'll see that the custodian will purchase items with the petty cash. So whenever the custodian is purchasing these items, there are going to be 2 things they have to keep track of. First, the custodian must keep the vendor receipts, and by keeping those receipts, we'll be able to count how much of the petty cash he's spent, and he'll keep an internal system as well. He'll have internal pre-numbered petty cash vouchers. We call them vouchers, but this is basically just a system and it's pre-numbered, as an internal control so that there's no missing numbers, no random use of petty cash. Maybe Albert wanted to buy some beer. Well, we would notice that there's a missing receipt or something like that. Okay. So what you'll notice is as he's spending this money, as he's paying these delivery fees, he's running to Staples to buy paper, we're not going to make any journal entries. No journal entries are made while he's making these purchases, okay? The journal entries are going to be made when we replenish the fund.

Alright. So let's pause here and let's take care of that journal entry in the next video.

Petty Cash:Replenishing the Fund

Alright. So some time has passed, maybe a month, and Alvaro realizes that the petty cash fund is running low. Maybe he finds he's got $12 left in it. Well, he's going to say, hey, guys. We need to replenish the petty cash fund. So, this is how this process goes. Eventually, we're going to have to replenish the fund as he spends the money. So let's go ahead through our example. Alvaro submits a request for an $84 check to replenish the petty cash fund.

Alvaro is going to check his receipts, and he checks in the petty cash box, which includes $42 he spent on postage, $18 on supplies, and $24 for deliveries. So now that we know how much he spent, notice this could have been several different things he's posted out. Right? A few deliveries have come in, so we're not keeping track of each one by itself. We're going to keep track of them kind of in batches like this. So what we're going to do is we're going to have a postage expense here. So we're going to have our postage expense that we'll finally post. And notice it's a debit to the postage expense as we would expect for $42, and we've got a supplies expense. So notice, this is another way we can increase our supplies expense. Usually, when we deal with supplies expense, we were doing it with our adjusting entries, right? We would have our supplies, and when we studied adjusting entries, we had our supplies expense in there. Well, we might have just small trivial expenses for supplies like those runs to Staples for some paper. So here we'll have $18 in supplies expense and then delivery expense. So we've got 3 expenses here we're taking care of. And now we're finally posting them to the journal. Notice, before when he actually made these purchases, we had not made any journal entries. We're finally making that journal entry now. So we've got our debits, and now we have to credit something here.

So the petty cash fund already had $100. So remember, if we think about it, there was this t-account here for Petty Cash. And in the previous journal entry, when we established the fund, it already had a debit of $100 there. So instead of doing multiple steps here and taking the money out of Petty Cash and then putting it back in, what we're going to do is we're just going to deal with the cash fund here. So when the company gives more money to Alvaro to replenish the fund, well, they're going to give him those $84. Right? Because if we see, we've got $42 in postage, $18 in supplies, and $24 in delivery. These right here, they total $84. Right? So that matches with his journal that he's been keeping for the petty cash. So what we're going to do is instead of crediting petty cash here, we're just going to credit the cash account and give him the money here. So at this point, the company is going to give Alvaro $84 more dollars to put in his box and keep track of his petty cash again, and he's back up to $100. Right? In the box, he had spent $84, so there was $16 left in the box, and now he's got $84 more dollars in there. He's back up to $100. So our petty cash fund is okay. It's sitting at $100 just like it should be, and now we're going to take care of those expenses that we've had. Right? So this is the little trick with Petty Cash here is that we're not going to credit Petty Cash again. We're going to leave Petty Cash as it is at $100, and we're going to use the cash account to replenish it. Okay? So, that's what you want to pay attention to there is that we're not going to credit petty cash and then do another journal entry to fill it up again. It's just all done in one entry just like this. So what happened is we had some expenses that we paid in cash, right? So we're going to decrease our cash account for $84, and we have expenses. So I'm not going to write them all out, but we have expenses, and those decrease our income, which, in essence, decrease our equity, right? And those totaled $84 so everything stays balanced here. Petty Cash isn't so tough. There's one more little trick that comes up in Petty Cash, and that's when there's a little discrepancy. Maybe Alvaro's box doesn't totally match up with the receipts. Let's see what happens in that situation in the next video.

Petty Cash:Cash Over and Short

Alright. So sometimes, when Alvaro goes and does a petty cash transaction, maybe there are pennies that get lost here and there. Maybe something costs $5.34, and the pennies, you know, got lost along the way or he took some pennies out of his pocket to fill something in, and the petty cash won't totally match up with the receipts. So, let's see what happens in that situation. Alright. So now notice Alvaro notes that there's $17 left in his petty cash fund, and he asked for an $83 check to replenish the fund. Alvaro's receipts are the same as before: $42 for postage, $18 for supplies, and $24 for deliveries. So, if you'll notice, just like before, we had $42 plus $18 plus $24 in expenses, and that came out to $84. Right? But notice that Alvaro only asked for an $83 check. There's a dollar that we've gained somewhere along the way. Alvaro does magic like that. He's our office manager and he does great things for us. He just makes dollars appear out of nowhere, but this actually does happen in petty cash where it'll kind of be off by just a little bit. So, what do we do in that situation? We're going to use a special account called cash over and short. Okay. Cash over and short, this is where we take those small discrepancies in petty cash and we put them in this account. So sometimes, if there's not enough money, well, it'll be short. Right? We're short in our petty cash and that's kind of like a loss, and if we have extra money like in this situation, that's like a gain. So, let's do the same as before. We'll have our expenses. So, we'll have a postage expense for $42. We'll have our supplies expense for $18 and our delivery expense for $24 here. So remember, those total $84, but the cash that's coming out of the bank account is only $83. So, our credit here to cash is going to be $83. This is how you're going to want to pay attention, in these petty cash problems. This is usually how they'll test you because it has that one little extra layer of trickiness with this cash over and short account. So, this is what you're going to want to pay attention to. You're going to want to put all your expenses first. You're going to want to put your cash, and then the discrepancy. You're going to want to see if there's more cash or more credits or more debits. In this case, we have more debits. Right? The expenses were $84 but our cash was only $83. So, what we're going to need is $1 more dollar of credits, right, for this to balance out, and that's going to be our cash over and short account. Okay. So, notice in this case, it's a credit, right? So, this is kind of like some sort of miscellaneous gain. If we were to show our income statement, we wouldn't probably not show the cash over and short account because it's such a small thing. We would probably lump this in with other miscellaneous expenses that don't have so much value in them. We would might we would lump them together. So, it would probably show up on the income statement as you know miscellaneous expense on the income statement or sorry in this case, it's not an expense, right? Because Alvaro does his magic, and we have some extra money. So, this would actually be like a miscellaneous gain in this situation where we have like an extra dollar that came out of nowhere. Cool? So, notice our journal entry is balanced. So what happens here? We still have cash decreasing by $83 when we replenish the fund. Right? We took $83 out of cash, and what's happening in equity? We had those expenses that totaled $84 just like before. Right? So that's a decrease to our equity in the amount of $84, but this doesn't balance yet. Right? There's that cash over a short. So, in this situation, we were over. So we had this extra dollar that the company benefited from here. So, the cash over or short, I'm gonna put OS. That was a $1 increase to equity, and we're balanced out here. We've got an $83 decrease to cash, $83 net decrease there in equity, so everything balances out. This is the main thing here with petty cash is to pay attention that when we have this small discrepancy, we're gonna use this cash over and short account. That can either be a credit or a debit. If it's a debit, that's because we were short. If it's a credit, it's because we were over. Right? So, just pay attention there. Make sure you get all your expenses as debits. Your cash account is your credit, and then plug in the cash over and short account to make the journal entry balance. Cool. That's about it for petty cash. Nothing too crazy here. Let's go ahead and move on to the next topic.

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.