Petty cash is a small amount of money kept on hand to cover small expenses such as office supplies or minor repairs. A petty cash fund is established with a fixed amount and is replenished periodically as it is used.
1. Establishing the Petty Cash Fund
When you first set up a petty cash fund, you create a journal entry to transfer the initial cash amount to the petty cash account.
Example: Setting Up a Petty Cash Fund
Assume your business establishes a petty cash fund with $500 on January 1, 2024.
Journal Entry on January 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Petty Cash A/c Debit | 500 | |
| 01-01-2024 | To Cash A/c | 500 |
Explanation:
- Petty Cash will debited to recognize the establishment of the petty cash fund.
- Cash will credited to reflect the reduction in the cash account.
2. Recording Expenses Paid from Petty Cash
Since expenses are paid from petty cash funds, you keep receipts and record the expenses in the appropriate accounts. These expenses are usually recorded when the fund is replenished.
Example: Recording Petty Cash Expenses
Assume that during January 2024, you used petty cash to pay for office supplies ($120) and postage ($80).
Journal Entry on January 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Office Supplies Expense A/c Debit | 120 | |
| 01-31-2024 | Postage Expense A/c Debit | 80 | |
| 01-31-2024 | To Petty Cash A/c | 200 |
Explanation:
- Office Supplies Expenses will be debited for the amount spent on office supplies.
- Postage Expenses will be debited for the amount spent on postage.
- Petty Cash will credited to reduce the petty cash fund by the total expenses.
3. Replenishing the Petty Cash Fund
When the petty cash fund runs low, you replenish it by writing a check or withdrawing cash from the bank to bring the fund back to its original amount.
Example: Replenishing the Petty Cash Fund
If the petty cash fund is replenished by $200 on January 31, 2024, the following entry is made:
Journal Entry on January 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Petty Cash A/c Debit | 200 | |
| 01-31-2024 | To Cash A/c | 200 |
Explanation:
- Petty Cash will debited to bring the petty cash fund back to its original amount.
- Cash will credited to reflect the outflow of cash from the bank account.
4. Recording Travel Expenses Paid Through Petty Cash
Example:
On April 15, 2024, your business used $100 from the petty cash fund to pay for a taxi ride for a business meeting.
Journal Entry on April 15, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-15-2024 | Travel Expense A/c Debit | 100 | |
| 04-15-2024 | To Petty Cash A/c | 100 |
Explanation:
- Travel Expense will debited to record the cost of travel.
- Petty Cash will credited to reflect the outflow of cash from the petty cash fund.
5. Recording Miscellaneous Expenses Paid Through Petty Cash
Example:
On May 20, 2024, your business spends $30 of the petty cash fund on miscellaneous items such as coffee for the office.
Journal Entry on May 20, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 05-20-2024 | Miscellaneous Expense A/c Debit | 30 | |
| 05-20-2024 | To Petty Cash A/c | 30 |
Explanation:
- Miscellaneous Expense will debited to account for the expense.
- Petty Cash will credited to reduce the petty cash fund.
6. Increasing the Petty Cash Fund
If the business decides to increase the petty cash fund, the excess amount is transferred to the petty cash account.
Example: Increasing the Petty Cash Fund
Assume that on February 1, 2024, the business decides to increase petty cash by $300, bringing the total to $800.
Journal Entry on February 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 02-01-2024 | Petty Cash A/c Debit | 300 | |
| 02-01-2024 | To Cash A/c | 300 |
Explanation:
- Petty Cash will debited to increase the fund.
- Cash will credited to reflect the reduction in the cash account.
7. Decreasing the Petty Cash Fund
If the business decides to reduce the petty cash fund, cash is withdrawn from the petty cash account and returned to the general cash account.
Example: Decreasing the Petty Cash Fund
Assume that on March 1, 2024, the business decides to decrease petty cash by $200, for a total decrease of $600.
Journal Entry on March 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-01-2024 | Cash A/c Debit | 200 | |
| 03-01-2024 | To Petty Cash A/c | 200 |
Explanation:
- Cash will debited to increase the cash account.
- Petty Cash will credited to decrease the petty cash fund.
8. Recording Repair Expenses Paid Through Petty Cash
Example:
On June 10, 2024, your business used $75 from the petty cash fund to pay for minor repairs to office equipment.
Journal Entry on June 10, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06-10-2024 | Repairs and Maintenance Expense A/c Debit | 75 | |
| 06-10-2024 | To Petty Cash A/c | 75 |
Explanation:
- Repairs and Maintenance Expenses will debited to record the cost of the repair.
- Petty Cash will credited to reduce the petty cash fund.