Journalizing Petty Cash Transactions

  • Demonstrate petty cash journal entries and reconciliation

 

Back to our example in the previous section: Greta, the Chief Financial Officer (CFO) of a business, establishes a petty cash fund by writing a check for $100, cashing it at the bank in exchange for five $20s, and putting the cash in a secure box at the front desk. The CFO puts her assistant, Frank, in charge of the funds. The bookkeeper, Carlos, records this transaction in the journal as follows:

JournalPage 101
Date Description Post. Ref. Debit Credit
20–
Jan. 1 Petty Cash 100.00
Jan. 1       Checking Account 100.00
Jan. 1 To record transfer of cash from checking to cash box

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. Both of these numbers reflect reality and you could verify them by (a) reconciling the bank statement to the checking account in the general ledger and (b) by looking in the cash box and counting the money in there.

Two T accounts side by side. On the left is a Checking account. There is a debit balance carried forward of 15,286.61 dollars and a credit entry of 100 dollars. There is an ending debit balance of 15,186.61 dollars. On the right is a Petty Cash account. There is a debit entry of 0 dollars and another of 100 dollars. There is a total debit balance of 100 dollars.

At the end of the month, assume the $100 petty cash fund has a balance of $6.25 in actual cash (a five-dollar bill, a one-dollar bill, and a quarter). Frank, who is the responsible person, has been filling out the voucher during the month, and all the receipts are stapled to the voucher.

Petty Cash Voucher
Custodian: Frank Wright Balance: 100.00
DATE Paid to/Rec’d from Purpose Amount Balance
1/10/20XX UPS shipping to customer 22.75 22.75
1/10/20XX USPS postage stamps 50.80 73.55
1/15/20XX Carmen S. Diego flowers for office 19.05 92.60
  1. An independent employee, say the controller (Fei Xu), examines and approves the petty cash voucher;
  2. Fei Xu sends it to the accounts payable clerk (Keisha) who cuts a check for $93.75 payable to Petty Cash;
  3. The company treasurer, or CFO in this case, Greta, signs the check (along with a bunch of other checks) and it goes back to Frank, the petty cash custodian; and
  4. Frank takes the check to the bank, cashes it, and then restores the cash in the fund to its $100 balance.

The journal entry created when the check is cut looks like this:

JournalPage 102
Date Description Post. Ref. Debit Credit
20–
Feb. 1 Shipping Expense 22.75
Feb. 1 Postage 50.80
Feb. 1 Office Supplies 19.05
Feb. 1 Cash Over/Short 1.15
Feb. 1       Checking Account 93.75
Feb. 1 To record check #1041 replenishing petty cash

 

Sometimes the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users. These errors cause the cash in the fund to be more or less than the amount of the fund less the total vouchers. We post the discrepancy to an account called Cash Over and Short. The Cash Over and Short account can be either an expense (short) or a revenue (over), depending on whether it has a debit or credit balance. It’s uncommon to have cash over, but it happens occasionally.

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). 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.

Using T Accounts to stand in for full ledgers would make posting the entry look like this:

Two T asset accounts side by side. On the left is the checking account, which has a debit balance carried forward of 15,186.61 dollars. There is a credit entry of 93.75 dollars from a check numbered 1041. On the right side is the petty cash account. There is a debit entry of 100 dollars and a total debit balance of 100 dollars.

Two Expense T accounts. On the left is the Office Supplies account. It has a debit entry of 86.86 dollars. It also has a check entry on the debit side for a check numbered 1041 at a value of 19.05 dollars. There is a total debit balance of 105.91 dollars. On the right is the Shipping account. It has a debit entry of 891.58 dollars. There is also a debit entry from a check numbered 1041 worth 22.75 dollars. There is a total debit balance of 914.33 dollars.

Two T accounts side by side. On the left is the postage account. It has a debit entry for 100.96 dollars and another debit entry for 50.80 dollars from check number 1041. There is a total debit balance of 151.76 dollars. On the right side is the Cash Over/Short account. There's a debit entry of 14.80 dollars. There's also a debit entry for 1.15 dollars from a check numbered 1041. There is a debit total of 15.95 dollars.

Entries to the petty cash fund itself are fairly rare. With your knowledge of accounts, debits and credits, and T accounts, you should be able to figure out any entries that crop up. Other than the entry establishing the fund, there are only three other times you might make an entry to the petty cash account:

  1. If the fund needs more cash, the journal entry looks the same as the entry to establish the fund.
  2. If some cash is returned to the bank because the accounting staff (probably the controller or the CFO) think there is too much in the box, the entry is the reverse of the establishing entry.
  3. If petty cash is closed out because it’s no longer needed, the entry is the reverse of the establishing entry.

As you think back on this system, note that there are several internal controls in place, most notably segregation of duties, assignment of responsibility, and a reconciliation (monitoring) process. In the next section, we’ll look at one of the most important cash controls, the bank reconciliation process, in detail.