Petty cash journal entries: set up, replenish, short and over

Most businesses pay their bills by bank transfer, card or check, so every payment leaves a trail. But some costs are too small to be worth that: a few stamps, a courier tip, milk for the office, a replacement key. For these, a business keeps a small amount of cash in a locked box, looked after by one person, the custodian. That box is the petty cash fund, and recording it properly takes only three kinds of entry.

This page explains the imprest system, the standard way of running petty cash, then works through establishing the fund, replenishing it (including when the cash does not quite add up) and changing its size, using numbers from our practice set.

How the imprest system works

Under the imprest system the fund has a fixed amount, say $500.00. At any moment, the cash in the box plus the receipts for what has been paid out should add up to that amount. When the cash runs low (or at the end of each month, so that the expenses land in the right period), the custodian hands the receipts to the bookkeeper, who cashes a check for exactly the amount spent. The box is back to $500.00 in cash, and the receipts become the support for recording the expenses.

The key idea for the books: the Petty Cash account only changes when the size of the fund changes. Day-to-day payments from the box are not journalised one by one. They are recorded in a single entry when the fund is replenished, and that entry credits the bank account (Cash), not Petty Cash.

1. Establishing the fund

Juniper Landscaping set up a petty cash fund of $500.00 by cashing a check drawn on its bank account.

Money has moved from one asset (the bank account) to another (the cash box). Nothing has been spent, so there is no expense yet. Recording the $500.00 as an expense on day one is the most common beginner's mistake with petty cash.

2. Replenishing the fund

At month end the box holds $327.09 in cash and receipts for postage $32.84, a courier delivery $60.36, printing flyers $41.15, and a small repair to a door lock $38.56. A check is cashed to bring the fund back to $500.00.

Step 1: the check. The check is always the fund minus the cash on hand: $500.00 − $327.09 = $172.91.

Step 2: the expenses. Group the receipts by account. Postage and the courier are both delivery costs: $32.84 + $60.36 = $93.20 to Delivery Expense. The flyers are Advertising Expense, $41.15. The lock is Repairs Expense, $38.56. Total receipts: $172.91, which matches the check.

Step 3: the entry.

Notice what is not there: Petty Cash. Before replenishing, the box held $327.09 of cash and $172.91 of receipts; afterwards it holds $500.00 of cash. The fund is $500.00 throughout, so its account balance does not move.

3. When the cash does not add up: cash short and over

In practice the receipts and the cash on hand rarely match the fund to the cent. Change is given wrongly, a receipt goes missing, a coin falls behind the drawer. The difference goes to Cash Short and Over, an account that collects small, unexplained cash differences. A debit balance (more shortages than overages) is treated as a miscellaneous expense; a credit balance as miscellaneous revenue.

Same receipts as above, but the box holds $329.16 in cash.

1. Check: $500.00 − $329.16 = $170.84.
2. Receipts: still $172.91.
3. The receipts explain $2.07 more than the cash that is missing, so the fund is over by $2.07. Credit Cash Short and Over.

Had the box held less cash than expected, say $325.00, the check would be $175.00, the receipts $172.91, and the $2.09 shortage would be a debit to Cash Short and Over. A reliable way to remember the direction: the check (credit to Cash) is fixed by the cash count, the expenses are fixed by the receipts, and Cash Short and Over is whatever makes the entry balance.

A small difference now and then is normal. Large or frequent ones are a warning sign worth raising with whoever is responsible for the fund, which is one reason a single custodian is accountable for each box.

4. Increasing (or decreasing) the fund

If the fund runs out every week, the business may decide to make it bigger. This is the only time, apart from setting it up, that Petty Cash itself is debited.

The fund is $500.00 and is being increased to $600.00. The box holds $329.16 and the same receipts as above. One check is cashed to replenish the fund and increase it.

The check covers the refill ($170.84) plus the increase ($100.00), so it is $270.84:

Reducing a fund works the other way: the extra cash is deposited back in the bank (debit Cash, credit Petty Cash for the reduction).

Controls that make petty cash work

• One custodian per fund, so responsibility is clear.
• A receipt or signed voucher for every payment, kept in the box until replenishment.
• Replenish at every period end, even if the box is not empty, so the expenses are recorded in the period they were incurred.
• Surprise counts by someone other than the custodian: cash plus receipts should equal the fund.

Why replenish at the end of every period?

Between replenishments, the expenses paid from the box are not in the ledger at all. They exist only as receipts in the box. If the period ends with $172.91 of receipts still sitting there, the income statement understates expenses by $172.91 and the balance sheet shows $500.00 of petty cash when only $327.09 of it is actually cash. The amounts are small, which is the whole point of petty cash, but the habit of replenishing at period end keeps the books complete without anyone having to make an adjusting entry for the box.

Some businesses also keep a simple petty cash log alongside the box: date, what was bought, amount, who received the cash, and the expense category. It makes the replenishment faster, because the receipts arrive already grouped by account, and it makes a missing receipt obvious.

Petty cash on the balance sheet

Petty Cash is reported as part of cash on the balance sheet, usually combined with the bank balances under a single "Cash" or "Cash and cash equivalents" line. Because the fund is kept at its fixed amount, the balance in the Petty Cash account is the same at every period end unless the fund was enlarged or reduced. If you see the Petty Cash balance drifting from month to month, the most likely cause is replenishment entries that credited Petty Cash instead of Cash.

Common mistakes

1. Expensing the fund when it is set up. It is a transfer between two cash accounts.
2. Crediting Petty Cash when replenishing. The check comes from the bank account; the fund is back to its full amount.
3. Debiting Petty Cash instead of the expenses. The receipts tell you what was spent; record those expenses.
4. Ignoring a shortage or overage. The check is set by the cash count, not by the receipts.
5. Forgetting the increase when a fund is enlarged in the same check.

How the practice works

Every exercise generates a new fund size, receipts and cash count. You choose accounts, enter amounts and press Check; your entry is compared line by line with one computed from the same facts, and each recognised mistake gets its own feedback. The lesson moves from setting up a fund to a clean replenishment, then one with cash short or over, and finally a replenishment that also increases the fund.