Principles of Financial Accounting: Internal Control and Cash - Petty Cash, Fund Establishing Reimbursing IncreasingDecreasing

What It Is

A petty cash fund is a small amount of cash set aside by a company to pay for minor expenses, such as office supplies, postage, and travel expenses. This fund is typically established to reduce the need for frequent checks and to simplify the accounting process. For example, if a company has a petty cash fund of $1,000, it can be used to pay for expenses like $50 worth of office supplies without needing to issue a check.

Key Concepts & Formulas

• Petty Cash Fund: A small amount of cash set aside by a company to pay for minor expenses. Example: A company establishes a petty cash fund of $1,000 to pay for office supplies.
• Reimbursement: The process of replenishing the petty cash fund after it has been used to pay for expenses. Example: A company reimburses its petty cash fund of $1,000 after it has been used to pay for $500 worth of office supplies.
• Petty Cash Fund Journal Entry: A journal entry to record the initial establishment of the petty cash fund. Example: Dr. Cash $1,000, Cr. Petty Cash Fund $1,000
• Reimbursement Journal Entry: A journal entry to record the reimbursement of the petty cash fund. Example: Dr. Petty Cash Fund $500, Cr. Cash $500
• Petty Cash Fund Increase/Decrease Journal Entry: A journal entry to record an increase or decrease in the petty cash fund. Example: Dr. Petty Cash Fund $200, Cr. Cash $200 (to increase the fund) or Dr. Cash $200, Cr. Petty Cash Fund $200 (to decrease the fund)
• Petty Cash Fund Balance: The current balance of the petty cash fund. Example: The petty cash fund balance is $500.
• Petty Cash Fund Ratio: A ratio to calculate the percentage of the petty cash fund to the total cash balance. Example: Petty Cash Fund Ratio = Petty Cash Fund Balance / Total Cash Balance

Journal Entry Examples

1. Initial Establishment of Petty Cash Fund:

Dr. Cash $1,000 Cr. Petty Cash Fund $1,000

This journal entry records the initial establishment of the petty cash fund by debiting cash and crediting the petty cash fund.

1. Reimbursement of Petty Cash Fund:

Dr. Petty Cash Fund $500 Cr. Cash $500

This journal entry records the reimbursement of the petty cash fund by debiting the petty cash fund and crediting cash.

1. Increase in Petty Cash Fund:

Dr. Petty Cash Fund $200 Cr. Cash $200

This journal entry records an increase in the petty cash fund by debiting cash and crediting the petty cash fund.

Common Mistakes

1. Mistake: Confusing debits and credits for expense accounts. Correction: Remember that debits increase assets and expenses, while credits increase liabilities and equity.
2. Mistake: Not recording the initial establishment of the petty cash fund. Correction: Record the initial establishment of the petty cash fund by debiting cash and crediting the petty cash fund.
3. Mistake: Not recording the reimbursement of the petty cash fund. Correction: Record the reimbursement of the petty cash fund by debiting the petty cash fund and crediting cash.

Exam Tips

1. Tip: Remember that the petty cash fund is a small amount of cash set aside by a company to pay for minor expenses.
2. Tip: Be careful when recording the initial establishment and reimbursement of the petty cash fund, as these are critical journal entries.
3. Tip: Use the petty cash fund ratio to calculate the percentage of the petty cash fund to the total cash balance.

Quick Practice

1. What is the adjusting entry for accrued salaries of $5,000?

Answer: Dr. Salaries Expense $5,000, Cr. Salaries Payable $5,000

This journal entry records the accrued salaries by debiting salaries expense and crediting salaries payable.

1. What is the journal entry to record the reimbursement of a petty cash fund of $500?

Answer: Dr. Petty Cash Fund $500, Cr. Cash $500

This journal entry records the reimbursement of the petty cash fund by debiting the petty cash fund and crediting cash.

1. What is the journal entry to record an increase in the petty cash fund of $200?

Answer: Dr. Petty Cash Fund $200, Cr. Cash $200

This journal entry records an increase in the petty cash fund by debiting cash and crediting the petty cash fund.

Last-Minute Cram Sheet

1. Petty Cash Fund: A small amount of cash set aside by a company to pay for minor expenses.
2. Dividends are NOT an expense – they go directly to retained earnings.
3. Petty Cash Fund Ratio: A ratio to calculate the percentage of the petty cash fund to the total cash balance.
4. Petty Cash Fund Journal Entry: A journal entry to record the initial establishment of the petty cash fund.
5. Reimbursement Journal Entry: A journal entry to record the reimbursement of the petty cash fund.
6. Petty Cash Fund Increase/Decrease Journal Entry: A journal entry to record an increase or decrease in the petty cash fund.
7. Petty Cash Fund Balance: The current balance of the petty cash fund.
8. Petty Cash Fund is a current asset.
9. Petty Cash Fund is not a liability.
10. Petty Cash Fund is not an equity account.