When Is Petty Cash a Debit or a Credit?

Petty cash is a small amount of money a business keeps readily available for minor, day-to-day expenses that are too small or inconvenient to pay with checks or credit cards. It provides a convenient way to handle incidental costs like office supplies, postage, or small reimbursements. This article will explain how these small transactions are recorded in accounting using debits and credits, offering clarity on when petty cash acts as a debit or a credit.

Understanding Debits and Credits

In accounting, debits and credits are fundamental concepts used to record every financial transaction. These terms refer to the left and right sides of an accounting entry. Every transaction impacts at least two accounts, a principle known as double-entry bookkeeping, ensuring that financial records remain balanced.

Debits increase asset accounts, such as cash or equipment, and expense accounts. Conversely, credits decrease these same accounts. For example, when a business buys equipment with cash, the equipment asset account is debited to show an increase, and the cash asset account is credited to show a decrease.

On the other hand, credits increase liability, equity, and revenue accounts. Debits decrease these types of accounts. For instance, when a company earns revenue, the revenue account is credited, and if cash is received, the cash account is debited.

Establishing a Petty Cash Fund

Establishing a petty cash fund involves setting aside a specific amount of cash from the company’s main bank account. This amount, typically $100 to $500, is placed in a secure location. This process creates a distinct asset account for petty cash, separate from the general cash account.

The accounting entry to establish this fund involves two steps. The “Petty Cash” asset account is debited to increase its balance. Concurrently, the main “Cash” asset account is credited, decreasing the balance in the general bank account. For example, if a business sets up a $200 petty cash fund, the entry would be a debit of $200 to Petty Cash and a credit of $200 to Cash.

Recording Petty Cash Expenses

Individual expenses paid from petty cash are not immediately recorded. Instead, these expenditures are typically tracked using petty cash vouchers or receipts, which detail the amount and nature. This approach avoids the need for numerous small journal entries, streamlining the accounting process.

When it is time to replenish the fund, or periodically, these accumulated expenses are formally recorded. The accounting entry involves debiting the specific expense accounts, such as “Office Supplies Expense” or “Travel Expense.” Simultaneously, the “Petty Cash” account is credited to reflect the decrease in the fund’s balance. For example, if $50 was spent on office supplies from petty cash, Office Supplies Expense would be debited for $50, and Petty Cash would be credited for $50.

Replenishing the Petty Cash Fund

Replenishing the petty cash fund restores its original balance. This involves issuing a check from the main bank account to cover expenses. The accumulated receipts and vouchers are reviewed to determine the exact amount needed for replenishment.

The accounting entry for replenishment involves debiting the various expense accounts, such as office supplies, postage, or travel expenses. The sum of these debits equals the total cash spent from the fund. The main “Cash” account, representing the bank balance, is then credited for the total amount of the replenishment check, as cash is being withdrawn from the bank. If there is a discrepancy between the cash remaining and the receipts, a “Cash Over and Short” account is used. A shortage would be debited to Cash Over and Short, treated as an expense, while an overage would be credited, treated as revenue, ensuring the entry balances.