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Accounting Savvy for Business Owners – Excerpt Chapter 4

Petty Cash Expenses

Accountants frequently receive questions about how to handle cash layouts for business expenses. Usually, the questions involve one of the following scenarios:

  • Someone used cash or a personal credit card to buy something for the company and that person needs to be reimbursed.
  • Someone used the debit card for the business account to withdraw cash and didn’t use all of that cash for a business expense; the remaining cash needs to be tracked.
  • Someone is going to be traveling for the company and needs cash in advance (and will need to return unspent cash).

There are other scenarios similar to these, but the ultimate question is, “How do I manage cash transactions that fall outside of the usual data entry for vendor bills and payments”?

The best solution is to have a cash box, a metal box that locks in which you keep a certain amount of cash. Then, you track the cash that goes in and out of the box by creating a petty cash account in your chart of accounts. This account treated like a bank account. (If you’re using accounting software, the Account Type is “Bank”.) Here’s how a petty cash box works:

  1. You put money in it.
  2. You account for the money that’s disbursed.
  3. When almost all the money is spent you replenish the money in the box.

The petty cash account in your accounting system doesn’t represent a real bank account; it just represents the money that moved from the real bank account into the cash box.

Filling the Cash Box

You have to put money into the cash box, both literally (get cash) and figuratively (record a withdrawal from your bank account to your petty cash account). Most of the time the cash box is filled the first time by writing a check to Cash from your bank account, cashing the check at the bank, and bringing the cash back to the box. The check should be in the amount you want to use as the “base amount” for incidental cash expenses.

When you create the check in the bank account in your accounting system, post the check to the Petty Cash account you created. You don’t post a petty cash check to an expense; instead the expense postings are recorded when you disburse cash from the box.

The transaction journal credits (reduces) the bank account and debits (increases) the petty cash account, as seen in Table 4-7.

Account Debit Credit
1000 – Bank Account 100.00
1020 – Petty Cash 100.00

Table.4-7: Putting money into the petty cash box is like a transfer of funds between banks.

Recording Petty Cash Disbursements

As you take cash out of the petty cash box in the office, you must record those disbursements in the petty cash account in your accounting system.

Make it a hard and fast rule that nobody receives cash for reimbursement without a receipt, and store the receipts in a large envelope marked with the current tax year (e.g. Cash Payments  2010). Store the envelope with your tax return, just in case you hear from an auditor.

Tracking Petty Cash Disbursements for Expenses

When you provide petty cash to someone who needs to be reimbursed for purchases, record those disbursements in the petty cash account (not in the bank account; the bank account is for expense reimbursements that are provided by a check). Make sure you have a receipt that indicates the details of the purchase.

If you’re using accounting software, create a check in your petty cash account (which is a fake check, of course) and post it to the appropriate expense account. If the software automatically inserts a check number, you can change the number it to the word “cash”, delete the number, or accept the number (because you’re never going to get a bank statement and have to reconcile this account, the check number reference doesn’t matter).

When you record a petty cash disbursement, you usually don’t need to enter a vendor name (because these expenses usually don’t have to be tracked the way you track vendors that send bills and for whom you need to keep a history). If you wish, you can create a single vendor named PettyCash for all petty cash disbursements.

You can keep the receipts in the cash box and create the fake check transaction weekly (or even monthly if you don’t  have a lot of cash disbursements). Just create a line item for each expense and post the total for that expense. Mark the receipt “ENTERED” and move it to your “cash payments” envelope when you’ve posted the receipt to your accounting system.

Tracking Petty Cash Advances

You have to track advances you disburse from the cash box so that the petty cash account in your accounting system always matches the amount of cash in the box. However, advances for future expenses aren’t expenses (yet), so they have to be posted differently.

Create an account of the type Other Current Asset, and name it Petty Cash Advances. If you’re using numbered accounts, select a number in the appropriate range for Other Current Asset.

When someone needs a cash advance, perform both of the following steps:

  1. Have the person sign an IOU that says he or she took $XX.XX dollars. Put the IOU in the cash box, and disburse the money.
  2. Enter the transaction in your accounting system, using a fake check from your petty cash fake bank account. Post the transaction to the account named Petty Cash Advances.

When the person who took the advance spends the money, one of the following scenarios occurs:

  • More than the advance was spent and the person has receipts for the entire amount spent (the advance and the additional out-of-pocket expenses).
  • Less than the advance was spent and the person has receipts for the spent amount and has the left over cash.
  • The money spent is exactly equal to the amount of the advance (it almost never works this way).

The best way to manage moving the advanced monies out of the Petty Cash Advances account and into the appropriate expense account(s) is to create a journal entry. You have a choice of two methods for doing this, and you should choose the one that’s easiest and least confusing for you.

  • You can move all the advanced funds back into the Petty Cash account (essentially voiding the IOU), and then create your disbursements from within the Petty Cash account as described earlier for tracking disbursements for expenses.
  • You can include all the postings to expenses in addition to the return of any advanced funds in a single journal entry.

Note that no matter which way you enter the transaction, you are only tracking the money advanced to this person.

There may be additional money in the Petty Cash Advances account representing other advances to other people. You are not emptying the Petty Cash Advances account; you are only moving the funds for this particular advance.

Let’s say the advance was for $100.00. If you want to move the funds back into the Petty Cash account and create the transactions to cover the disbursements separately, create the journal entry seen in Table 4-8.

Account Debit Credit
1020 – Petty Cash (ersatz bank  account) 100.00
1300 – Petty Cash Advances 100.00

Table 4-8: Return the money to the Petty Cash account and post the expenses in a separate journal entry.

If you want to perform both tasks (removing the advance and posting the disbursements) in one journal entry, Table 4-9 provides a sample transaction for the scenario in which the person spent $120.00 ($20.00 of her own money in addition to the $100.00 advanced) and has receipts. This transaction moves funds directly from the Petty Cash Advances account to the appropriate expense accounts, and then takes the additional money spent from the Petty Cash account (because you have to give additional cash to the person from the cash box).

Account Debit Credit
1300 – Petty Cash Advances 100.00
6200 – Tolls & Parking 50.00
6150 – Office Supplies 40.00
6220 – Meals 30.00
1020 – Petty Cash .20.00

Table 4-9: This journal entry changes the money that was advanced into expenses.

If the person spent less than the advance, and is returning money to the petty cash box, your journal entry must reflect that fact, as seen in Table 4-10. This transaction moves funds directly from the Petty Cash Advances account to the expenses, and puts the leftover cash back into the Petty Cash account (reflecting the fact that you actually put money back into the cash box).

Account Debit Credit
1300 – Petty Cash Advances 100.00
6200 – Tolls & Parking 20.00
6150 – Office Supplies 20.00
6220 – Meals 30.00
1020 – Petty Cash 30.00

Table 4-10: Remove the advance and dispense it to expenses along with the cash returned to petty cash.

If the person spent exactly the amount advanced, then you remove the money from the Petty Cash Advances account and post the expenses (see Table 4-11). Since no money is returned to the cash box nor is more money taken from the cash box, the Petty Cash account isn’t included in the transaction.

Account Debit Credit
1300 – Petty Cash Advances 100.00
6200 – Tolls & Parking 30.00
6150 – Office Supplies 40.00
6220 – Meals 30.00

Table 4-11: Move the money out of the Petty Cash Advances account and into expense accounts.

Re-filling the Cash Box

As you dispense cash from the cash box, you need to replace it. The usual method is to bring the cash box back to its original balance (the amount of the first check you wrote to petty cash). Use the same steps you used to write the first check to petty cash, using the total amount of funds disbursed as the amount of the check. This brings the total available in the cash box back to the original amount.

You can write the check for less than the disbursed funds if you determine that you were putting too much money in the cash box, or you can write the check for more than the disbursed funds if you think you need to increase the amount of cash available in the cash box.

 

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