Petty cash is small amounts of money issued to a few employees (e.g., office administrators, human resources managers, treasurers) to buy office supplies or organize the company’s events. The amounts are generally less $500. As an accountant for three different companies, I think that the process of issuing petty cash is the same for big businesses with some small variations, at least in the three organizations that I was with. Furthermore, due to its insignificance, there is no accrual for petty cash. Therefore, the petty cash process should be similar between companies that follow an accrual basis or a cash basis. In this post, I will provide some petty cash journal entry examples to illustrate how the process looks like in a company.
Petty Cash Funding
For simplicity’ sake, let’s assume I am an office administrator for HappyTimeOrg, which is a small CPA firm. One of my responsibilities is to ensure office supplies are not running low. Due to my duty, I must make small purchases frequently. If the company does not give me any cash, I will have to come to the Accounts Payable (AP) team every time I need to buy something. Thus, even small expenditures need manual checks from AP. Besides, it takes time for AP to process manual checks. This process does not work in case of an emergency. To avoid this situation, the company gives me $300 in cash to keep. The petty cash journal entry example is as follows.
In reality, for me to have $300 cash in hand, I need to send my supervisor a request. After that, my boss needs to send AP his approval. Based on the approved request, the AP team will cut me a $300 check. I will then need to go to the bank to deposit the check.
Replenishing Petty Cash Journal Entry Example
After receiving the fund, I can make as many purchases as necessary, of course, within the limit. Every time I need to buy something, I keep the receipts for it as well as any backup documents. When my petty cash balance runs low, I will send a request to AP to replenish the balance, together with all the invoices and backups of purchases that I made. Let’s assume I bought ten notebooks for $30 and twenty pens for $50. The petty cash journal entry example is as below.
As can be seen, the purchasing activity does not affect the petty cash account. In fact, this account should remain inactive, and its balance should stay at a constant amount. The purchases that I make are only journalized when I send in a request to replenish my petty cash balance. Another noteworthy point is that petty cash journal entries should be originated from Accounts Payable. Accountants do not have anything to do with the funding, and the recharges of petty cash.
For Accounts Payable Specialists who are in charge of processing petty cash refill requests, they should carefully review all the invoices, along with the request forms. There should be a standard template for petty cash expenditures. The amounts and descriptions listed in the requests should match with the information on backup receipts. If there is a mismatch, it is the job of AP Specialists to follow up with the requesters to clarify the mismatch and request additional documents if needed.
For accountants, it is necessary to do monthly reconciliations for the petty cash account if the account balance is greater than a specific threshold, which is usually $1000. In the petty cash reconciliation, there should be a breakdown of the balance, accompanied by the information regarding the custodians, issue dates, approval forms, etc. The two petty cash journal entry examples mentioned above should also be included with the monthly reconciliations.
In some small companies, the petty cash fund is assigned to one person (the treasurer). When employees want to buy trivial things or when they are in urgent situations, they can come to that custodian to ask for money. Typically, a fund request comes with a receipt. Some employees pay out of their pocket and later come to the petty cash custodian for reimbursements. It is the task of the petty cash keeper to maintain a record of all expenditures, plus proper documentation. When the petty cash balance is low, the custodian sends a request to AP to replenish the fund. The petty cash journal entry example, in this case, is similar to the circumstance described above, where different employees are allowed to keep the fund. Expense accounts are debited, and cash accounts are credited. The balance of the petty cash account is unchanged.
Refund of Petty Cash Journal Entry Example
When employees return petty cash funds to companies, usually in the form of checks or money orders, the treasurers or office administrators of the companies are responsible for depositing the checks into the business bank accounts. In terms of accounting, accountants are the ones who record these receipts. As a general rule, miscellaneous receipts, such as vendor refunds or petty cash refunds, are booked by accountants. Accounts Receivable (AR) team only handles sales receipts. Let’s use the previous example. I found a better job and submitted a resignation letter. As a result, I must also return the $300 petty cash that I keep. The petty cash journal entry example for this return is as follows.
If I spent a portion of the $300 on something else when I return the fund, the petty cash journal entry example is like the below (assume I spent $100 on hosting a birthday party for staff). Usually, there is an account called “Employee Morale,” where any expenses for lifting employee spirit go there.
To sum up, the three petty cash journal entry examples mentioned in this post describe the entire petty cash funding process, from the time the fund is issued to the time it is returned. I hope you find this post useful.