Sometimes the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users. For cash overage in petty cash, we can make the journal entry with the debit of the expense accounts and the credit of the cash over and short account and the cash account when we replenish the petty cash. For example, on December 22, after reconciling the cash on hand with the cash sales, we find that there is a cash shortage of $5. The total amount of cash sales in the sales receipts is $2,790, however, the actual cash we have is only $2,785 (excluding the $100 cash prepared for small notes changes at the beginning of the day). This is probably due to there have been many transactions for our retail business as it is near holiday resulting in errors in our calculation.
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In this case, we can make the journal entry to record the cash overage by debiting the cash account and crediting the cash over and short account and the sales revenue account. To permit these cash disbursements and still maintain adequate control over cash, companies frequently establish a petty cash fund of a round figure such as $100 or $500. The petty cash account is a current asset and will have a normal debit balance (debit to increase and credit to decrease). Cash shortage usually happens when the actual cash on hand received from sales is less than the total amount in sales receipts for the retail business. For other types of businesses, it usually occurs when the cash on hand, left after petty cash expenses, is less than the total amount in petty cash expenses receipts.
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The cash the petty cash account cash short and over is a permanent account. overage or cash shortage may also come from the sale and other expense transactions too. However, to make it easy, we will only look at the petty cash transaction as the journal entry is usually the same. For example, the cash shortage needs the adjustment on the debit side while the cash overage needs the adjustment on the credit side.
Journal Entry for Cash Shortage
We make entries to the Petty Cash account only when the fund is established or when the amount of the fund is changed or when the fund is closed and we want to add back cash in exchange for the petty cash vouchers. In this case, the cash needed to get back to $100 ($100 fund – $7.40 petty cash on hand) of $92.60 equals the total of the petty cash vouchers. For another example, on January 31, we need to reconcile the petty cash expenses and replenish the petty cash to its full established petty cash fund. The Cash Over and Short account will be used to balance the entry when the cash needed to get back to the petty cash account does not match the total of petty cash vouchers.
However, the company still needs to account for the cash overage or shortage with a proper journal entry in order to match the balance on the debit with the balance on the credit in the accounting system. After calculation, even though the total petty cash expenses are only $82 ($45+$25+$12), we need to replenish $85 ($100-$15) as we have only $15 cash on hand left. Likewise, the $3 difference is the cash shortage that we need to recognize as a small loss. To illustrate, we will close the $100 original petty cash fund by returning the cash to the checking account with a debit to cash and a credit to petty cash. The cash over and short account is used when an imprest account, such as petty cash, fails to prove out.
For example, fraud situations may be traced back to the people directly responsible for a cash register or petty cash box. For example, assuming that there is a $5 cash overage instead when we replenish the petty cash in example 2 above, which results in the petty cash reconciliation looking like the below table instead. For example, at the end of the month, the receptionist of the company ABC needs to request reimbursement to refill the petty cash fund of $100. The primary use of the cash over and short account is in cash-intensive retail or banking environments, as well as for the handling of petty cash. This information is then used to track down why cash levels vary from expectations, and to eliminate these situations through the use of better procedures, controls, and employee training. In this case, when we replenish the petty cash, we just need to refill $77 ($100 – $23) as we still have $23 remaining in petty cash.
In this journal entry, the credit of the cash account is to refill the petty cash fund to its full established petty fund. At the same time, it also represents the cash outflow from the company as a result of petty cash expenses during the period. For other types of businesses, the cash shortage usually happens when dealing with petty cash.
Cash shortage example
The cash shortage may happen often with the retail business as it deals a lot with small notes when making the sales and the cash sales are usually need to be reconciled daily. Meanwhile, other types of businesses usually only have a cash shortage when dealing with the petty cash when it is needed to be replenished (usually once a month). Usually one individual, called the petty cash custodian or cashier, is responsible for the control of the petty cash fund and documenting the disbursements made from the fund. By assigning the responsibility for the fund to one individual, the company has internal control over the cash in the fund. Alternatively, if there had been too much cash in the petty cash box (a rare condition indeed!), the entry would be reversed, with a debit to cash and a credit to the cash over and short account.
In the next section, we’ll look at one of the most important cash controls, the bank reconciliation process, in detail. The account Cash Short and Over provides a way to monitor employees’ cash handling proficiency. This account also provides companies with the ability to monitor the handling of cash, since it can apply to tellering operations too.
- Meanwhile, other types of businesses usually only have a cash shortage when dealing with the petty cash when it is needed to be replenished (usually once a month).
- This cash shortfall is recorded as a debit to the cash over and short account (which is an expense) and a credit to the petty cash or cash account (which is an asset reduction).
- An examination of the account at this level of detail may show an ongoing pattern of low-level cash theft, which management can act upon.
- Alternatively, if there had been too much cash in the petty cash box (a rare condition indeed!), the entry would be reversed, with a debit to cash and a credit to the cash over and short account.
Cash shortage in retail business
- After posting to the ledger (we’ll use T accounts here), the checking account balance will go down by $100 and the petty cash balance will go up by $100.
- The cash over and short account is the type of miscellaneous account in the income statement.
- When the company has the cash overage in the petty cash fund, it can make the journal entry by debiting the expenses account and crediting the cash over and short account together with the cash account.
- The cash over and short account is an expense account, and so is usually aggregated into the “other expenses” line item in the income statement.
After the check is cashed, the petty cash custodian normally places the money in a small box that can be locked. We will not use the petty cash in a journal entry again unless we are changing this original amount. The cash over and short account is the type of miscellaneous account in the income statement. If its balance is on the debit side, it is usually presented in the miscellaneous expenses. On the other hand, if its balance is on the credit side, it will be presented as miscellaneous revenue instead. The account stores the amount by which the actual ending cash balance differs from the beginning book balance of cash on hand, plus or minus any recorded cash transactions during the period.
This system simply delays the recording of small expenses until the end of the accounting cycle or the fund is replenished. It’s not really an adjusting journal entry because there is an actual transaction being recorded. Having a petty cash account is just more convenient than going to the accounts payable clerk every time someone needs a stamp or a liter of coffee for a meeting.
Likewise, it can save us a bit of time and effort by including both cash shortage and cash overage into only one account. The cash over and short account is an expense account, and so is usually aggregated into the “other expenses” line item in the income statement. A larger balance in the account is more likely to trigger an investigation, while it may not be cost-effective to investigate a small balance. A sample presentation of the Other Expenses line item in an income statement appears in the following exhibit.
A controller conducts a monthly review of a petty cash box that should contain a standard cash balance of $200. He finds that the box contains $45 of cash and $135 of receipts, which totals only $180. This cash shortfall is recorded as a debit to the cash over and short account (which is an expense) and a credit to the petty cash or cash account (which is an asset reduction).
Companies replenish the petty cash fund at the end of the accounting period, or sooner if it becomes low. The reason for replenishing the fund at the end of the accounting period is that no record of the fund expenditures is in the accounts until the check is written and a journal entry is made. (Sometimes we refer to this fund as an imprest fund since it is replenished when it becomes low.). To determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure.
For example, assuming that we have a cash overage of $10 instead in example 1 above, as a result of having actual cash on hand of $2,800 which is more than the cash receipts of $2,790. When disbursing cash from the fund, the petty cash custodian prepares a petty cash voucher, which should be signed by the person receiving the funds. A petty cash voucher is a document or form that shows the amount of and reason for a petty cash disbursement. The cash over and short account is an excellent tool for tracking down fraud situations, especially when tracked at the sub-account level for specific cash registers, petty cash boxes, and so forth. An examination of the account at this level of detail may show an ongoing pattern of low-level cash theft, which management can act upon.
