How to properly replenish petty cash has been a source of confusion for many small business owners. As a practicing accountant, I find clients making the same mistake constantly, and it come from not understanding the full concept of petty cash. The concept is not difficult to understand; you just need to make sure you understand it.
First, think about what you are doing. You take a certain amount of money out of the bank; let’s say $100, and put it into a cash box. Remember, that the general ledger account, Cash-in-Bank, is an asset. An asset, you may recall, if you have taken my Accounting for Non-Accountants course, is an unused economic resource that your business owns (has possession or control of). All you have done, is shift $100 from Cash-in Bank to another asset account called Petty Cash. You deplete the cash in the box when you purchase such items as postage, office supplies, meals, gas for an auto, etc. When most of the cash is gone, you must replenish the fund. You do that by withdrawing more cash from the bank for the amount that has been depleted; let’s say $92.50. You should have $92.50 in receipts for expenses in the box. Those expenses are posted to their respective categories and the offset is, of course, Cash. Here is the journal entry:
DESCRIPTION DEBIT CREDIT
Postage 37.00
Office 14.50
Meals 36.50
Auto 15.00
Cash 92.50
The mistake occurs when you try to do this:
DESCRIPTION DEBIT CREDIT
Petty Cash 92.50
Cash 92.50
If you went with this second journal entry, you would end up with $192.50 in the Petty Cash account, which is an asset on your balance sheet, and zero in the expense accounts for postage, office, meals, and auto. This doesn’t seem right, does it? If you audited the petty cash box you would not find $192.50 in cash, vouchers and receipts. You would only find $100.00. The Petty Cash amount remains the same as originally established, unless you purposefully decide to increase it. Otherwise, petty cash expenditures must be recorded to their appropriate expense categories.
Go to the articles section of the blog to read my article, “Why Petty Cash” to find out why using a petty cash fund is a good accounting practice.
18 Comments
What do you do when your petty cash fund is more than what it should be. For example all my receipts total $101.47 and I have .43 on hand but my petty cash float is only $100.00 so Iam over my 2.00 what should I do to make it balance.
Audrey: Take $101.47 out of the bank in cash. Put $99.47 back into the petty cash box to replenish it to $100.00. Put the extra $2.00 in your pocket because that is where it had to come from. Record the $101.47 to all the appropriate expense categories and obviously the credit will be to cash.
John
What if you have a separate asset account for Petty Cash? I would need to credit that account & debit all the expenses that the purchases belong to. Then I would write a check out to “Petty Cash” or just to the company name? I would then credit my cash account & debit the petty cash?
Laura: You may want to review the article on Petty Cash again. You set up an asset account called Petty Cash. You write a check for cash, say for $100, and post it as a debit to Petty Cash and credit Cash. When you use the cash out of the Petty Cash box for various expenses you need to keep vouchers. When the cash gets low, it’s time to replenish the physical box for whatever the total of the vouchers comes to. You write a check for cash (you can put your company name on the check, it doesn’t matter) for the amount and replace the vouchers with the actual cash. Next, code it to all the appropriate expense GL accounts. Now your Petty Cash box adds up to $100 which is what your books say and you’ve posted all the expenses. Don’t do anything with the Petty Cash GL account unless you want to increase or decrease amount you keep in the box.
Using pretty cash Fund can’t be a good accounting practise, It’s even forbidden in India
Accounting-India: Interesting. I can’t imagine why using a petty cash fund would be a problem. Perhaps you could explain the rationale as to why it would be forbidden in India?
Accounting India: I cant see why petty cash would be problematic. What guidance are you referring to? IFRS has no issues with petty cash. It is similar to cash on hand and rather a separate classification of cash types.
In my own perspective, petty cash fund is not a problem. If you want to read about real Accounting in India, you can read the I latter provide.
What if we don’t have a “Cash on Hand” account? If I made the first entry you had but instead credited “Petty Cash”, and to replenish it I debited “Petty Cash” and credited “Checking” it would be pretty much the same thing that you’re doing here. Correct?
***Sorry “Cash in Bank” acount.
Kratg: You mean when you expense (debit) the total of your vouchers to their appropriate general ledger accounts, say for $50, and then credit Petty Cash (GL account) for $50, and then replenish the cash box by debiting Petty Cash for $50 and credit “checking” (which is the same as Cash in Bank) would you accomplish the same thing? The answer is yes, but you will have had to write an extra journal entry to accomplish it.
petty cash fund is good for internal control of money for small expenses, it is good for a service type of company..
John:
For legality purposes and audits – how crucial is it that the petty cash account in the chart of accounts is in balance? i.e. should petty cash be zeroed out at the end of each year. How critical is it in an audit that there are receipts to offset the account? Thank you.
Leslie: I don’t think it is a “legal” issue. However, I can tell you that when I was the internal auditor for the John P. Scripps Newspaper chain, the first thing I did when I walked in the door of a newspaper was to audit the cash drawer and petty cash box. The amount of money kept in petty cash may not be material in comparison to the net profit of the organization but it is an indicator of management practices. It can be a source for theft if not maintained properly. I wouldn’t say that it should be zeroed out at the end of the year. It should be kept in balance throughout the year and made doubly sure it is in balance at the end of the year. If you are having an external audit by a CPA firm and they find the petty cash out of balance it will be noted in the audit. If the audit is for a bank who has loaned the company money or for investors who are concerned about the integrity of the organization, etc., and the petty cash account if found to not be supported by appropriate receipts, it will be a black mark against you.
John
good morning, john!
my problem is just the same… but i wanna clarrify if this entry of mine is also correct.
assuming i had set up my petty cash fund already.
first entry would be: debit all my expenses and credit petty cash fund..
upon replenishment, my entry would be: debit petty cash fund and then credit cash in bank. is this correct?
Lani: Yes, the way you are describing works fine. It is an alternative to the way I explain it but the result is the same.
Petty cash is a relatively straight forward concept but I have seen on numerous occasions cash balances within the petty cash tin that exceed the original petty cash amount. Appropriate procedures need to be implemented across an organisation and communicated to non-finance staff and this should help to reduce petty cash errors from occurring.
Petty cash is a relatively straight forward concept but I have seen on numerous occasions cash balances within the petty cash tin that exceed the original petty cash amount. Appropriate procedures need to be implemented across an organisation and communicated to non-finance staff and this should help to reduce petty cash errors.
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