Petty Cash Accounting Journal Entries

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  • 0:04 Definitions
  • 0:46 Starting Petty Cash Funds
  • 1:13 Spending Petty Cash
  • 2:18 Replenishing Petty Cash
  • 2:46 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Petty cash is an important method of running an effective organization. In this lesson, we'll review what petty cash is used for and describe how it should be accounted for with journal entries.

Definitions

It's Hawaiian Shirt Friday at work, and your boss approves you ordering in some Hawaiian BBQ for the staff. Great! But how do you pay for it? One common answer is through petty cash. Before we jump into the accounting for your petty cash lunch, let's start with some important definitions.

Petty cash is the cash that a business location keeps on hand to pay for small purchases and needs that occur outside the procurement process. To protect the company's cash, petty cash is usually a low amount - just enough to cover unanticipated incidental expenses. A journal entry is an accounting transaction that either debits or credits accounts to document how funds are used and allocated throughout a company's accounting books.

Starting Petty Cash Funds

The journal entry to start a petty cash fund only happens once - when the petty cash is first taken out of the cash bank account and put into the petty cash fund. To reflect this in the accounting records, the cash account is debited and the petty cash fund is credited. Since both accounts are assets, a debit decreases the balance in the account and a credit increases the balance. If we were creating a $500 petty cash account, the journal entry would look like this:

Journal Entry to Create a Petty Cash Account

Spending Petty Cash

One of the nice things about a petty cash fund is that it doesn't require a journal entry for every transaction that occurs. If someone needs to spend $5 on postage, there isn't a need to do a journal entry right away, for such a small amount. However, there should be a petty cash ledger that tracks how the money is spent. Receipts from expenses should also be retained, since there will be a journal entry when the petty cash fund gets low and needs to be replenished.

Most of the expenses that are paid out of petty cash are office expenses, though there may be some entertainment and a few other categories. All that needs to be reported on the petty cash ledger is the date of the expense, the category, and the total cost. When it comes time to replenish petty cash, part of that process will be to set up the petty cash expenses by category and make journal entries for those transactions. If $240 was spent on supplies and $210 on entertainment, the journal entry would look like this:

Journal Entry to Record Expenses from Petty Cash Account

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