As a member, you'll also get unlimited access to over 79,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.
Try it risk-freeAlready registered? Log in here for access
Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.
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.
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:
 |
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:
 |
Since petty cash is an asset, when the balance decreases, we credit the account. Since entertainment and supplies are expense accounts, we debit them when the balance increases.
Replenishing petty cash requires a journal entry just like the original journal entry that established the petty cash account. After the supply and entertainment expenses, we need to put $450 more in petty cash. Just like when we set up the account, we are increasing the balance of petty cash - requiring a debit to the petty cash account, and a credit to the cash account.
Since we need to put $450 into the petty cash account from the cash account, our journal entry would look like:
 |
Let's review!
After this lesson, you should understand how to pay and account for that Hawaiian BBQ lunch. We defined petty cashas the cash that a business location keeps on hand to pay for small purchases and needs that occur outside the procurement process and journal entriesas accounting transactions that either debit or credit accounts to document how funds are used and allocated throughout a company's accounting books.
We also discussed the journal entries that need to be processed when petty cash is set up, spent, and replenished. Since petty cash and the cash account are assets, they are debited when their balance increases and credited when the funds decrease.
When the petty cash fund needs to be replenished, the expenses that have been paid for out of the fund are totaled by category based on the petty cash ledger, which tracks how the money is spent, and a journal entry is done by crediting petty cash (decreasing the value) and debiting the appropriate expense account.
To unlock this lesson you must be a Study.com Member.
Create your account
Already a member? Log In
BackAlready registered? Log in here for access
Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.
To learn more, visit our Earning Credit Page
Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.
Back To Course
Financial Accounting: Homework Help Resource7 chapters | 164 lessons
{{courseNav.course.topics.length}} chapters | {{courseNav.course.mDynamicIntFields.lessonCount}} lessons | {{course.flashcardSetCount}} flashcard set{{course.flashcardSetCoun > 1 ? 's' : ''}}
Your Cart is Empty. Please Choose a Product.
Watch 5 minute video clips, get step by step explanations, take practice quizzes and tests to master any topic.
Study.com has a library of 550,000 questions and answers for covering your toughest textbook problems
I love the way expert tutors clearly explains the answers to my homework questions. Keep up the good work!
- Maritess, College StudentStudy.com video lessons have helped over 30 million students.
"I learned more in 10 minutes than 1 month of chemistry classes"
- Ashlee P.
"I learned more in 10 minutes than 1 month of chemistry classes"
- Ashlee P.
"I aced the CLEP exam and earned 3 college credits!"
- Clair S.
Over 65 million users have prepared for {{displayNameByProductKey[registrationData.product || testPrepCocoon]}} and other exams on Study.com
"The videos have changed the way I teach! The videos on Study.com accomplish in 5 minutes what would take me an entire class."
- Chris F.
Over 65 million users have prepared for {{displayNameByProductKey[registrationData.product || testPrepCocoon]}} and other exams on Study.com
Over 65 million users have prepared for {{displayNameByProductKey[registrationData.product || testPrepCocoon]}} and other exams on Study.com
