This is Jody Trana with Chapter 8, Part 1 of Principles of Accounting. It's just not cost effective for a business to write checks or do electronic funds transfers every time there's a cost in the business, especially when there's small costs. So historically, companies have used a petty cash fund which is often a real box just like the one you see here with cash in it that's held in a particular place and approved employees can go to the cash box and get money out to pay for small things such as deliveries or treats for the office or things like that today we have a lot of electronic ways to pay and so companies may choose to do that kind of a process It would still be considered a type of petty cash. When items are paid for out of petty cash, there needs to be a system to keep track of what was purchased and the amount paid. This is a petty cash ticket.
Some companies use petty cash tickets to identify who spent the money, what it was for, and the account that should be debited. Companies also sometimes just keep track of all of the receipts for things that have been paid for. One way or the other, we need to know what money has come out of the box and for what purpose.
The petty cash system that we're talking about is called an impressed system. This system means that the general ledger account petty cash always remains the exact same amount as it was set up as. Let's talk about how the journal entries would look for setting up a petty cash fund. On August 1, Smart Touch Learning creates a petty cash of $200.
The custodian cashes the $200 check and places the currency in the fund box. What's the journal entry look like? to establish this petty cash fund. To set up petty cash, we debit the account called petty cash and that cash has to come from somewhere.
It comes out of our cash account, so we credit our cash account. In an impressed system petty cash, this is the only time that we will debit petty cash. If we do debit it again, it will be to adjust the amount of the account.
So let's say if we wanted our petty cash to be $300 instead of $200, we would debit it an additional $100. But that's the only time that we would debit or credit petty cash. Now that we've set up our petty cash fund, let's look at the receipts or the tickets for the whole month. Let's say that we total up these tickets and it comes up to $80. Now let's say that we have counted the cash that's still left in the box, and the cash in the box is $118.
So let's take a look at what we know. The petty cash normally has a balance of $200. Right now, there's only $118 worth of cash in the petty cash box. We need to get our petty cash back up to $200 and to do that we're going to need to add $82 back into our cash box. We have cash tickets of $80.
So there is a discrepancy of two dollars. What do we do with the two dollars and what is our journal entry to replenish the petty cash? So remember we decided that we needed to replenish our petty cash by $82. That's because our petty cash should have $200 in it and right now it only has $118.
So we know we're going to take $82 out of our cash account and put it into our petty cash box. Since our journal entry needs to balance, we need to have $82 on our debit side. We have $80 worth of petty cash tickets. $60 worth of office supplies and $20 worth of delivery expense.
That just leaves us $2 short to get us up to that $200 petty cash balance. We're going to debit that into our cash short and over account and this is the account we would use anytime our petty cash is a little bit off. Let's try a little bit more involved problem.
Here we have Pawnee Gaming Supplies. We're going to do three journal entries for them. First of all, on March 1, they're going to establish a petty cash with a $200 balance, the same balance as before.
On March 31, we're going to replenish the petty cash for the month's expenses that have happened and On April 15, we're going to increase the petty cash fund. All right, so the journal entry to establish a petty cash fund with a $200 balance. I bet you're pretty sure you're going to have a debit and a credit for $200. What are the accounts that you need to debit and what account do you need to credit?
Remember that this is an impressed petty cash system. So we're going to set up our petty cash. with one journal entry, a debit to petty cash, and a credit to cash.
Our petty cash account will no longer need any kinds of debits or credits to it unless we want to change the balance of it. Now the second journal entry that we need to do is for our replenishment of petty cash. The petty cash has only $19 in it.
and it has $188 in petty cash tickets. So we know that those petty cash tickets are for office supplies of $68 and entertainment expense of $120. We need to replenish the petty cash up to $200.
And we also, it's possible that we have a shortage or an overage in our petty cash that we need to adjust for. If our petty cash is a $200 balance account and our cash box has exactly $19 in it right now, our first question to ask is how much cash will it take to get our petty cash box up to $200? Since we have $19 in there right now, it will take $181 to get our cash box up to $200.
That's the amount we're going to take out of our cash account and put into our petty cash. We have tickets that tell us that office supplies need to needs to be expensed $68 and entertainment expense needs to be debited $120. We're going to be off on this account by seven dollars.
What's our journal entry going to look like? Let's look at our expenses first. We have tickets for office supplies of $68 and we have tickets for entertainment expenses of $120.
So we know we need to do those two debits. We also know that we need to do a credit of $181 because the cash box should have $200 in it and it only has $19 in it. The cash, short and over, is used as a balancing number. so that our debits and our credits balance.
In this case, we need to put it in our over column, which is the credit column. And for our final journal entry, we've decided that we want to increase the balance of the petty cash fund to $250. This is the only time that we will be using our petty cash in a journal entry after setting up petty cash initially.
The journal entry to adjust our petty cash up to $250 will be a $50 adjustment since we already had $200 in our petty cash. We will debit petty cash for $50 and credit cash for $50.