Is Cash Over and Short an Asset, Liability, or Expense?

Handling physical cash is a routine activity for many businesses, especially those with numerous daily transactions. This constant flow of currency can lead to discrepancies between the amount of cash physically present and the amount recorded in accounting records. Such minor variations are a common and expected part of managing cash, particularly in retail environments or when dealing with petty cash funds.

Defining Cash Over and Short

“Cash over” occurs when the physical cash on hand exceeds the amount accounting records indicate should be present. For example, if a cash register should contain $500 but reveals $505, there is a $5 cash overage. Conversely, “cash short” describes a situation where the physical cash on hand is less than the recorded balance. If that same register contains $495 instead of $500, there is a $5 cash shortage.

These discrepancies typically result from minor operational errors. Common reasons include small mistakes in giving change to customers, incorrect entries during sales transactions, or mathematical miscalculations when tallying cash. Tracking them helps maintain accuracy in financial records and can indicate areas for improved cash handling procedures.

Accounting for Cash Over and Short

The “Cash Over and Short” account is classified as a temporary income statement account, not an asset or a liability. It serves as a balancing mechanism for minor cash differences arising during day-to-day operations, particularly in cash-intensive businesses like retail and banking, or for managing petty cash.

When cash is “over,” the amount is treated as miscellaneous revenue, increasing the company’s income. Conversely, a “cash short” situation is recognized as a miscellaneous expense, which decreases income. These amounts usually appear on the income statement, often aggregated under “Other Income” or “Other Expenses,” because their individual balances are small. While the “Cash Over and Short” account is not an asset or liability on the balance sheet, its impact on income indirectly affects retained earnings at the end of an accounting period.

To illustrate, for a cash shortage, the journal entry debits the “Cash Over and Short” account and credits the “Cash” account to reflect the actual cash count. For example, a $1 shortage means a $1 debit to Cash Over and Short and a $1 credit to Cash.

For a cash overage, the “Cash” account is debited to increase its balance, and the “Cash Over and Short” account is credited. A $1 overage means a $1 debit to Cash and a $1 credit to Cash Over and Short.

At the close of an accounting period, the balance in the “Cash Over and Short” account is closed to the Income Summary or Retained Earnings. This process is similar to how other temporary income statement accounts are handled.