A petty cash fund is small amounts of cash a business sets aside for common expenditures such as office supplies, postage due on mail or fuel expenses. It is a fund allocated to pay expenses for which the company does not write a check or purchase on account. Also known as an “imprest fund," it is replenished exactly in the amount that is expended from it. The balance of the fund should always equal the balance amount established for the fund.
Write the journal entry when the petty cash fund is established. Assume that the local bookstore determined that $100 cash should be kept on hand for miscellaneous expenses. A two-line journal entry should be recorded for this transaction: Line 1: Petty Cash: Debit: 100.00; Line 2: Cash: Credit: 100.00; As the entry indicates, no funds have been spent on miscellaneous expenses thus far.
Record the journal entry for miscellaneous expenses and replenish the petty cash fund. Assume, reusing the example in Step 1, the bookstore spent $25 on gas, $12.50 on office supplies, $28 on meals and $11.50 on postage. The following entries should be recorded under the "expenses from petty cash" heading: Line 3: Expenses from Petty Cash Line 4: Gas: Debit: 25.00; Line 5: Office Supplies: Debit: 12.50; Line 6: Meals: Debit: 28.00; Line 7: Postage: Debit: 11.50; Line 8: Cash: Credit: 77.00; You deplete the cash from the fund with the purchases. Therefore, the purchased goods, Line 4 through Line 7, are debited, and the total depleted amount of cash is credited on Line 8. The receipt for expenses in this example is $77. Therefore, cash in the amount of $77 must be added to the petty cash drawer to replenish the fund.
Make adjustments for the cash short and over. Although careful steps are taken to ensure internal cash management, errors do occur. Especially when handling petty cash and change, the sum is not always equal to its parts. If $21 is the amount left in the petty cash drawer, but the receipts only add up to $77, the amount left in the drawer and the receipts add up to $98; the $2 shortage from the first established petty cash fund of $100 is referred as cash short and over. Now the journal entry will look as follows: Line 3: Expenses from Petty Cash Line 4: Gas: Debit: 25.00; Line 5: Office Supplies: Debit: 12.50; Line 6: Meals: Debit: 28.00; Line 7: Postage: Debit: 11.50; Line 8: Cash Short & Over: Debit: 2.00; Line 9: Cash: Credit: 79.00; In this case, the cash of $79 must be added to the petty cash drawer to replenish the fund.