 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at petty cash. This topic is covered in introductory financial accounting course, the CPA exam for section. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have one thousand six hundred plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I covered, including many CPA questions. If you like my lectures, please click on the like button. It doesn't cost you anything. Share them, put them in playlists. If they help you, it means they might help other people, especially these days with the coronavirus out there. Many students are relying online to learn the material. And please connect with me on Instagram. If you'd like to supplement your accounting education and study for the CPA exam, please check out my website, Farhad Lecture Style. So generally speaking, when the company make payment, not generally speaking, always you should make a payment using a check. And we talked about why check, because check will have a record. Who did you pay? When, what for and for how much and who signs the check? However, for small payments for items such as shipping fees, minor repairs, low cost supplies, let's assume your employees are working over time and you'd like to buy them a pizza, you know, some pizza and soda. For those expenditure, you're not going to go through the voucher system and try to get purchase order and approval. What you do is you will keep some money, actual money on hand for those, for those type of necessities. And how do you start this process? First, the company will have to establish what's called a petty cash fund. So money on hand is a petty cash fund, actual money. So the company will establish a fund and let's assume we establish a fund for seventy five dollars. What does that mean? It means we want to keep on hand seventy five dollars for items such as papers for in case we run papers, papers for the printer we ran out. Again, pizza, donuts, shipping, some small, minor expenditure. So what we do, the entry is we debit petty cash, which is an asset and we credit cash, which is an asset. So simply put, we took seventy five dollars from the bank and now we have the seventy five dollars at the place of business at the office. This is when we establish the fund. After we establish the fund, what we need to do, we need to keep track of our expenditure. So that seventy five dollars is not used unless someone gives us a receipt, give a submit request for the money and they will need to provide us with a receipt for the expenditure. So let's assume for the month of November, here's what we have. We spent forty six dollars and fifty cent on tile cleaning. Maybe this tile cleaning company, the only accept cash, they don't accept check. We paid fifteen dollars and five five cent for transportation of merchandise. Remember, transportation in is a merchandise inventory and tile cleaning is a miscellaneous expense. We paid five dollars for delivery expense, customer package delivery and we paid four dollars and seventy five cent of office supplies that were immediately used. Therefore, we're going to expense them. So all in all, we spent for the month of November, all in all, seventy one dollars and thirty cent. Now, if I ask you if we spent if we spent seventy one dollars and thirty cent, OK, if we spend that much, how much cash we should still have and the answer should be we should still have cash of three dollars and seventy cent. This is cash. Why? Because the pity cash fund should add up to seventy five dollars. Should add up to seventy five dollars. So the receipts plus the cash. So I'm going to highlight the cash and I'm just going to circle the cash in green. The cash plus the receipt should always equal to seventy five dollars. Now, what we do, we have this report, we prepare this report and we submit this report to the accounting department, asking them to process the journal entries and give us seventy one dollars. Therefore, the accounting department will make the following entry. They will debit miscellaneous expense for the cleaning supplies. They will debit merchandise inventory for the transportation. They will debit delivery expense and they will debit office supplies expense and they will give us seventy one dollars and thirty cents to replenish the fund. And once we have, once they give us seventy one dollars and thirty cent, remember, we have three dollars and seventy cent. We are back to where we need to be at seventy five dollars. Now, sometime what we need to do, we need more than seventy five dollars. For example, seventy five dollars may not be enough. Let's assume we would like to keep one hundred dollar on hand. Well, to increase the petty cash fund, we ask for twenty five dollars. They give us a check. We go cash it, get the cash back, a twenty dollar bill and a five dollar bill. And we have now one hundred dollar of petty cash. And sometime if we have too much cash on hand, like, for example, we don't need seventy five. We only need fifty five. We reduce the cash amount. We give them twenty dollars cash. We give them back to the company. So cash will go up and petty cash will go down. So this is one we need to increase and decrease the petty cash. Now, one thing we have to deal with when we are dealing with cash is cash over and cash short. Sometime it's a chance that we could have made a mistake for the reimbursement. Sometimes somebody may give us the wrong change, gives us more cash. So we're going to have to deal with cash over and cash short. Either we have more cash than we're supposed to or less cash. So if the petty cash fail to obtain a receipt for the payment or overpay for an amount, cash over or cash short with the results. So this could happen. The petty cash payment report plus cash left in the account will not total to the fund balance. So what we do when that happened, we look at a petty cash payment report. So we look at the receipt plus the cash left that should always equal to the fund balance. And our example, our fund balance was seventy five dollars. So anytime we add all the all the receipts plus the cash to that up to seventy five dollars. If that's not the case, if we have a shortage, we're going to debit an account called cash over and short. If we have more cash than we're supposed to, somebody gave us the wrong, the wrong, the wrong, the wrong change. Then we might have more cash than we have overage. And let's assume we have a petty cash fund established at two hundred dollars. Let's assume we have that's the case. And let's see what we have at the end of the period. We counted the cash. We have fifteen dollars in cash. We counted all the receipts and we have one hundred and seventy five one hundred and seventy eight dollars worth of receipts. So if we take the receipts one seventy eight plus fifteen dollars plus fifteen dollars, that's going to give us ninety three one hundred and ninety three dollars. What does that mean? It means we are short seven dollars. We are short seven dollars. Why? Because the receipts plus the cash should equal to two hundred. So if the cash is not there, simply put, we're supposed to have cash of how much we're supposed to have cash of twenty two. That's what we're supposed to because if we have cash of twenty two, if this number was twenty two, that shouldn't be any problem whatsoever. This will equal to two hundred. But that's not the case here. So what entry do we make? We debit the expenses or whatever we did, the expenditure for one seventy eight for the receipts. We debit an account called cash over and short of seven dollars and we credit cash. Now if we had more cash, let's assume that's assume we had just to change the scenario. Let's assume we had one hundred and seventy eight dollars of receipts and we we happen to have twenty five dollars in cash. Let me change the pen here. Let's assume we had twenty five dollars in cash. What does that mean? It means we have in total two hundred and three dollars. Two hundred and three dollars gives us a three dollars overage. Now we have a three dollars overage. Now the miscellaneous expense will be debited one seventy eight. We will have a credit of three dollars and the difference will be the cash. So all what they need to give us now is one hundred and seventy five dollars in cash. Why? Because if they reimburse us with one seventy five and we have twenty five that we still have twenty five. We are back to our total, which it's supposed to be two hundred dollars. Now if you like this lecture, please click on the like button and share it with others. Subscribe to the channel. In the next session, I'm going to look at the bank reconciliation. As always, I would like to remind you if you're looking for additional resources, visit my website. If you're studying for your CPA exam, take it seriously. It's a twenty to thirty year investment in your career. It's worth it. Study hard and stay safe during those coronavirus days. Please stay safe.