In all cases, the amount of the purchase using petty cash would be considered to not be material in nature. Recall that materiality means that the dollar amount in question would have a significant impact in financial results or influence investor decisions. Petty cash accounts are managed through a series of journal entries. Entries are needed to 1 establish the fund, 2 increase or decrease the balance of the fund replenish the fund as cash is used , and 3 adjust for overages and shortages of cash.
Consider the following example. The journal entry to establish the petty cash fund would be as follows. In this case, the cash account, which includes checking accounts, is decreased, while the funds are moved to the petty cash account.
One asset is increasing, while another asset is decreasing by the same account. Assume the following activities. At the end of July, in the petty cash box there should be a receipt for the postage stamp purchase, a receipt for the milk, a receipt for the window cleaner, and the remaining cash. The employee in charge of the petty cash box should sign each receipt when the purchase is made.
As the receipts are reviewed, the box must be replenished for what was spent during the month. The journal entry to replenish the petty cash account will be as follows. Typically, petty cash accounts are reimbursed at a fixed time period. Many small businesses will do this monthly, which ensures that the expenses are recognized within the proper accounting period.
In the event that all of the cash in the account is used before the end of the established time period, it can be replenished in the same way at any time more cash is needed.
If the petty cash account often needs to be replenished before the end of the accounting period, management may decide to increase the cash balance in the account. If the management at a later date decides to decrease the balance in the petty cash account, the previous entry would be reversed, with cash being debited and petty cash being credited. Occasionally, errors may occur that affect the balance of the petty cash account.
This may be the result of an employee not getting a receipt or getting back incorrect change from the store where the purchase was made. In this case, an expense is created that creates a cash overage or shortage. The entry to record a cash shortage is as follows. 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. In this case, the expense balance decreases, and the year-end balance is the net balance from all overages and shortages during the year. If a petty cash account is consistently short, this may be a warning sign that there is not a proper control of the account, and management may want to consider additional controls to better monitor petty cash.
A petty cash system in some businesses may be replaced by use of a prepaid credit card or debit card on site. What would be the pros and cons of actually maintaining cash on premises for the petty cash system, versus a rechargeable debit card that employees may use for petty cash purposes? The amount listed in the petty cash account is almost always overstated, since the various petty cash custodians are always disbursing petty cash in exchange for receipts for expenses incurred.
In order to present a petty cash number that is more accurate, you could replenish all of the petty cash boxes just prior to the balance sheet date, and record all related petty cash expenses at the same time. However, the amount of cash and expenses involved is quite small, so the absolute accuracy of the petty cash balance is immaterial to the results and financial position presented in the financial statements.
Consequently, petty cash balances are rarely updated just to improve the accuracy of the financial statements. Petty Cash funds may be established for payment of minor or infrequent expenses where it is otherwise impractical to obtain a university check or use a procurement card. See also: University Policy 3. Funds should be reconciled at least monthly and every time a Disbursement Voucher DV is requested to replenish the fund.
The check should be cashed at the company's bank and the cash placed back in the petty cash safe or lock box. Record the check on the balance sheet with a debit to the business bank account, a credit to the petty cash account and then use the petty cash receipt slips to expense the different accounts that the petty cash was used to pay. Based in Lake Mary, Fla. Tober has also self-published two children's picture books. She holds a Bachelor of Arts in business administration from the University of Florida.
By Charity Tober.
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