Petty cash funds are a handy way for businesses to handle small, everyday expenses without the hassle of writing checks. They're like a mini-bank for quick purchases, managed by a trusted employee who keeps track of every penny spent.

Setting up and managing petty cash involves specific accounting entries. From establishing the fund to replenishing it, each step is carefully recorded. When discrepancies pop up, they're addressed promptly to keep the books balanced and prevent any funny business.

Petty Cash Fund

Purpose of petty cash funds

• Provide a convenient way to make small, routine business purchases (office supplies, postage, employee reimbursements)
• Eliminate the need to write checks or process expense reports for minor transactions, reducing administrative costs
• Allow quick access to cash for emergency expenses (unexpected repairs, last-minute supplies)
• Maintain a record of small expenditures through petty cash log and receipts
• Assign responsibility for managing the fund to a petty cash custodian who ensures proper use and documentation

Journal entries for petty cash

• Establish the fund by debiting Petty Cash and crediting Cash for the initial amount (Petty Cash $200, Credit Cash $200)
• Replenish the fund when necessary by debiting appropriate expense accounts based on receipts (Office Supplies Expense $75, Postage Expense $30) and crediting Cash for the total replenishment amount ($105)
• Increase the fund size by debiting Petty Cash and crediting Cash for the additional amount needed (Petty Cash $50, Cash $50)
• Decrease the fund size by debiting Cash and crediting Petty Cash for the excess amount (Cash $25, Petty Cash $25)
• Record each disbursement to maintain an accurate audit trail

Handling petty cash discrepancies

• Address overages (actual cash exceeds recorded balance) by debiting Petty Cash and crediting Cash Over and Short account, then investigate the cause and make corrections
• Address shortages (actual cash is less than recorded balance) by debiting Cash Over and Short account and crediting Petty Cash, then investigate the cause
  • Correct errors by adjusting journal entries
  • Address theft or misuse per company policy (disciplinary action, improved internal controls)
• Monitor discrepancies closely to identify patterns or significant issues that require changes in petty cash management procedures (more frequent audits, additional training for custodian)
• Consider the materiality of discrepancies when determining the appropriate course of action

Petty Cash Controls

• Implement cash controls to safeguard petty cash funds and prevent misuse
• Ensure segregation of duties by assigning different individuals to manage, authorize, and reconcile petty cash transactions
• Maintain a clear audit trail through proper documentation and record-keeping
• Regularly review and update petty cash procedures to strengthen internal controls