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.
Journalizing Petty Cash Transactions
These controls are designed to provide reasonable assurance regarding the effectiveness and efficiency of operations, the reliability of financial reporting, and compliance with applicable laws and regulations. A key component of this framework is the segregation of duties, which ensures that no single individual has control over all aspects of a financial transaction. This division of responsibilities reduces the risk of errors going undetected and deters fraudulent activities.
Accounting Ratios
- If the cash in the register is less than the sales there is said to be a cash shortage.
- 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.
- The goal is to trace the origin of the discrepancy, whether it’s a simple cashier error or a more complex issue like misrecorded sales.
- Surprise cash counts add an additional layer of security by preventing employees from preparing for the count, which can help to uncover any discrepancies that might otherwise be concealed.
- This is because they involve with cash sales that currency changes are required.
This term pertains primarily to cash-intensive businesses in the retail and banking sectors, as well as those that need to handle petty cash. If a cashier or bank teller errs by giving too much or too little change, for example, then the business will have a “cash short” or “cash over” position at the end of the day. Alternatively, if there had been too much cash in the petty cash box (a rare condition indeed!), the entry would be reversed, with a debit to cash and a credit to the cash over and short account.
4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
A petty cash fund is a type of imprest account, which means that it contains a fixed amount of cash that is replaced as it is spent in order to maintain a set balance. Count the money remaining in your petty cash account at the end of an accounting period. Now subtract the amount remaining from the account’s original balance to determine by how much you need to replenish the account. In the example, if your petty cash account’s original balance was $1,000, subtract $550 from $1,000 to get $450, which is the amount by which you need to replenish the account.
How to Do a Petty Cash Reconciliation
Let’s now assume that when the petty cash fund is replenished, there is $6.00 on hand and there are $93.00 of petty cash vouchers. In this case, we can make the journal entry to record the cash overage by debiting the cash account and crediting the cash over and short account and the sales revenue account. In this journal entry, the credit of the cash account is to refill the petty cash fund to its full established petty fund. At the same time, it also represents the cash outflow from the company as a result of petty cash expenses during the period. Sometimes the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users.
- For other types of businesses, it usually occurs when the cash on hand, left after petty cash expenses, is less than the total amount in petty cash expenses receipts.
- After the check is cashed, the petty cash custodian normally places the money in a small box that can be locked.
- To safeguard against cash handling errors and misappropriation, businesses implement internal controls that serve as a framework for financial integrity.
- In the example, debit the office supplies expense account for $300, and debit the transportation expense account for $140.
The shortage journal entry is one of many bookkeeping entries used in accounting, discover another at the links below. The cash over and short account is an excellent tool for tracking down fraud situations, especially when tracked at the sub-account level for specific cash registers, petty cash boxes, and so forth. An examination of the account at this level of detail may show an ongoing pattern of low-level cash theft, which management can act upon. For example, fraud situations may be traced back to the people directly responsible for a cash register or petty cash box. Finally, surprise petty cash counts should be made to maintain good internal control over the fund. For example, assuming that there is a $5 cash overage instead when we replenish the petty cash in example 2 above, which results in the petty cash reconciliation looking like the below table instead.