 In this presentation, we will talk about how to set up and record a petty cash fund. Setting up a petty cash fund seems like an easy thing to do to have a minimal amount of cash that we can have expenditures for small purchases for. However, it can be a little bit tricky to set up the petty cash fund. And there is kind of a shortcut to recording transactions for the petty cash fund. So we'll go over the process of setting up the petty cash fund, recording the initial investment in the petty cash fund, and then recording the activity from the petty cash fund. Now the objective, of course, in this will be to have not just the checking account where we need authorization in order to take money out of the checking account, we would typically want anything going out of the checking account to be by electronic fund transfer or by check so that we have a clear paper trail of what is going on. The petty cash, however, if we just have some small items that we need to take care of with cash, and it's just convenient to have small items with cash to be paid, the petty cash fund is good to have. The idea of the petty cash fund, of course, being that the small purchases we make with the petty cash are probably going to be in material in nature compared to the other purchases and therefore not affect our financials too much. And the petty cash, we're going to try to keep at a level that it's small enough that if it was stolen, it wouldn't increase the likelihood of people trying to rob us for the petty cash fund that we will have on hand. And that if it was stolen, again, it would be something that would be in material because we will have less safeguards over the petty cash given that we have cash on hand rather than the money in the bank account. So we want to keep that level pretty steady at what the petty cash will be, be able to monitor and track to some extent what is going in and out of the petty cash as we go. So we'll talk about that by setting up a petty cash account. We're going to start with a trial balance here. It's just going to have out some limited accounts because we're really only working with the cash and the petty cash and then we'll have some expenses when we start to spend out of the petty cash here. So here's going to be our trial balance. The debits are going to be non-bracketed. The credits here are going to be bracketed. The zero here indicates that if we were to add up the debits and subtract out the credits, they would be equal and therefore add up to zero. Net income is now $4,905. That's this $10,000 of revenue minus all the expenses to get to income not loss, income credit over the expenses, credit over the debits, $4,905. Now we're just going to set up the petty cash fund and it's as easy as you would think to set up a petty cash fund. Clearly we're going to in our chart of accounts have another account called petty cash and we will set up that account. We're going to try to pick some number that we think is a good enough number to cover those small types of purchases but not too high to have too much cash at any one given time and we're going to say that's going to be $250. So what we're going to do is just set up the petty cash. It's a debit balance account. It's going to be a cash account, asset account, has a debit balance. We're going to increase it, doing the same thing, another debit. And the other side will of course be coming out of the checking account. So we're just going to move money, write a check from the checking account or take money out of the checking account and put it into the petty cash account. Therefore the checking account is going to go down. It's a debit balance. We're going to do the opposite thing to it, a credit. So we are in essence just adding another cash type account to our chart of accounts to our trial balance. Posting this out to our little worksheet, we're going to say that petty cash is going to go from zero up by this debit in the debit direction to $250. The cash account is going to go from this $2,205 down in the credit direction down in the credit direction to $2,255. So we just lowered the cash account, set up the petty cash. Pretty straightforward. Next item we're going to have, and if we saw that in context of course, then if we pull over all the other accounts, we are still in balance. We're still at a zero balance here. No effect on net income, just in essence bringing the cash account down, putting the money into the petty cash. Next we're going to say that the activity happened during the month and we need to replenish the petty cash. So at the end of the month, we're going to say, hmm, how much cash is left of the $250 we put in there? We have not been taking it out as we go. What we have done is just paid whatever petty cash out for minor purchases and we now have $19.17 left in the petty cash at the end of the time period. What we also have are receipts that we got from the petty cash disbursement. So anytime we spent petty cash, we wrote it down or we got a receipt for it and we're putting those into the safe, the petty cash drawer in order to track our petty cash. Now we need to replenish it. Now the way you might think that we would want to replenish this would be to first do a journal entry, taking everything out of petty cash and then replenishing it with cash. But this is the kind of a tricky part. We're going to do a bit of a shortcut which will save us some time in the data entry. So first we're just going to go through and we're going to say, okay, what did we spend money on according to our records? Any kind of receipts that we kept or any kind of thing that we wrote down to help us track what we spent money on? And we're going to record the debits to these expense accounts in accordance with that. So we're going to say that there's janitorial expenses of some kind that we had to deal with, which was $78 that we spent out of petty cash. We're going to say that there's miscellaneous expenses. We just have a receipt in our drawer and that's all we wrote down. We probably should be more specific than that. But and it could have been it could have been something more specific and we're just going to put it into miscellaneous expense because there's no other account that that we want to set up for such a small item possibly. We're going to say that then we have postage expense that we paid money for postage for $3.50. And again, we're just going to pull these from the expenses. We're going to record our journal entry. These are all debit balance accounts. So we're going to increase them by doing the same thing to it, which is a debit, which is building our journal entry by what we find in the petty cash drawer in terms of our records for what we spent this $250 on of which we only have $19.17 left. We're going to say we had advertising expense of $57. That's something we spent our petty cash on. And that's all we have in our drawer now. So if we think about this, then we're going to say, okay, well, we had $250 in there at the beginning. And now we spent $78 minus $78 minus $63.68 minus $43.5 minus $57.15. So according to our records, the receipts that we have and the original amount that we had in place, you would think that we would be left with $7.67. However, we are left with $19.17. So we have a difference there. We can't just put the difference of the $7 there. We've got a problem because we're left with $19. So we're going to do a subtraction problem there. We're going to say, okay, well, we think we should have been left with $17, but we got $19. If we subtract out minus the $19.17, then we have a difference, an over-short difference of this $11.50. A difference between what our records show starting at $250 minus the activity that we show in accordance with our records, the difference of $11.50 off. We're going to put that difference into the cash over and short. So the cash over and short account is going to be that difference of the $11.50 that we'll need in order to be in balance. Now, the tricky thing is that you would think that the difference here would go to the petty cash account. So in other words, if we're saying that the petty cash only has that $19.17 in it left, you would think we'd say, okay, well, there's $250 minus the $19.17, and that would be $230.87 that we would have to write this down by in order to bring it to this $19.17. And then do another journal entry, taking money out of the cash account and putting it into the petty cash account. So you could, and we could do it that way. That would be a legitimate way to do it, but often we could skip those steps. And instead of writing this down to 19 and then write another check, bringing it back up, which would be, you know, more journal entries, we could just put this difference just $2,030.83 into the cash account. So we're just basically going to write a check for cash of the difference that we need $230.83 to bring this account back to what's already in our account here. We already have $250 here. This is what we need in order to bring the balance back up to that from the checking account. So one more time. In other words, we could have done this two different ways. We could have said this $230.00 is what we need in order to bring this balance down to zero or in order to get us in balance, the debits minus the credits equals this $230.83. So after this transaction, total debits would equal total credits. We could have put this instead of to cash to the petty cash fund, bringing the balance down to the $19.17, which would make sense. And then write another journal entry, which would be crediting the cash account by $230.83 and then debiting the petty cash by $230.83 to bring this back up to $250. But that's some repetitiveness there. So most of these type of problems will just say, Hey, I'm just going to skip that extra step. And we're not going to reduce the petty cash fund. We're just going to write a check out of the cash account here, apply it to all the expenses that have already been expended. And then the difference, of course, will go to the cash over and short. So if we post this out, then we're going to say that the janitorial expenses are here, 400 debits going up in the debit direction to 478. We have the miscellaneous expenses are going to go from the 650 up by the 6368 to 713.68. We have the postage 43.50, increasing the postage by 100 from 100 by 43.52, 143.50. Then the advertising is going to increase the 300 by 57.15 to 357.15. The cash over short is going to be here. Now this is going to be our new account here. And it could be something that's going to increase income or decrease income, depending on if we're over or short on the cash. In this case, it's actually going to increase income because we must have basically miswrote one of these items here that were in the petty cash. And we have this difference, which is going to increase the net income with a credit here. So it could be a debit, it could be a credit. It could go either way. This cash over short, in other words, doesn't have like a normal, normal balance. It's not always going to have a debit normal balance like every other type. Most other accounts do, for example, expenses are all debits and the revenues, a credit balance, normal balance. But the cash over short could flip from a debit balance to a credit balance. And then we've got the cash is going to go down by the 230. So we're actually writing a check and we're taking more money out. We're taking 230 out. You can say we got that cash, we go to the bank and take the 230, 83 out. And we put it back in the drawer, back in the petty cash drawer. But when we recorded it, when we record the taking of this money out, we're going to record it to the expenses that we had already expended. The expenses we had already expended really came out of the original $250. And that's just going to be again, that kind of shortcut that we can do to put this in more easily. Note that this transaction will, of course, decrease net income. All the expenses are going up because that's what we spent the petty cash on net income, revenue minus expenses then going down by what we spent the petty cash on. Now if we're back at the 250, if we wanted to increase the balance, if we're saying, hey, the 250 is not enough for our petty cash needs, we spend more than that in whatever the month's time period, then we might want to increase that minimum balance, whatever that level is to say 450. And then of course, all we'd have to do is take out increase the petty cash by the 200 to bring it up to 450 and write another check, take it out of the checking account. So now we're going to, we're going to say, hey, I don't want to keep that level at 250. We want to keep the new level at 450. So if we post this out, then petty cash is going to go up by this 200 from 250 up by that 200 to 450. And then the cash accounts going to go down in the credit direction. So here's the debit balance. It's going to go down by that 200 to 1,824.17. So this is just like the original investment. If we wanted to increase or decrease the minimum balance, then we could just do that same type of transaction, taking it out of the checking account, put it into the petty cash account. And then if we do this replenishing one more time, now we're at the 450 is the minimum level, we spent a month's worth of stuff out of petty cash again. And we're trying to say, okay, we have to record this information. And we're left with if we do a count at the end of the month, $288.389. So we're going to do this same type of calculation, we're going to look through all the receipts that we have in the petty cash drawer for month two, and see what we can align those two in terms of expense categories. So if we look through the petty cash drawer, we're going to say there's a postage expense, it's an expense debit balance, we're going to increase a debit to our journal entry, we're going to say there's a mileage expense. So that's an expense. We're going to put that into a debit for our journal entry, delivery expense. So it's an expense to debit balance, we're going to debit it to our journal entry. And that's all we have this time. So if we if we add this up, then we have now the 450 minus the 48.36 minus the 38.5. Let's do that one more time 450 minus the 48.36 minus the 38.5 minus the 39.75 gives us the 332.39. That's what we would think that we had left. However, the physical count shows us that we have 288.39. The difference then to 88.39 is $35. So we're going to say there's an overshort then of 35 this time needing to be a debit. And then the credit's going to go to cash, we're going to reduce the cash. And we can we can know that, you know, obviously, if we add all these up, it should add up to 161.61. And if we take the difference between the 450 minus the 288.39, that gives us that same 161.61. That's what we need in order to, you would think, take the petty cash down to the physical count. So again, same journal entry, we could have taken the petty cash reduced it by the 161.61 to bring it down to what we physically counted it to be 288.39 and then done another journal entry to take money out of the checking account and put it into the petty cash account for the same amount 161.61 to bring the balance back up to the $450. However, of course, we can reduce that process, the number of journal entries by instead just taking the money out of the checking account and replenishing this. So in essence, we're taking the money out of the checking account, we're getting that physical cash, putting it back in the petty cash drawer, but we're never really adjusting the petty cash because we're writing that original 450 off for the expenses that happened during the month. So if we post this, then we end up right where we need to be. We've got the postage expense going up from a 143.50 up in the debit direction to the 191.86 and then we've got the mileage here. Here's the mileage expense going up debit here, debit there. It's going up in the debit direction. We've got the delivery expense here going up in the debit direction as all expenses do. We got the cash over in short being a debit this time. So notice it's going to flip and that's what can happen with the over in short account. It could be a debit balance. It could be a credit balance. It has no real normal balance. And so it flipped this time to 23.50. Now this scenario might be more familiar, one we might see more often, in that the receipts that we added up don't add up to what we think the receipts should be given the physical count, meaning it looks like we spent money on something and didn't record it in here. So that is probably more typical than us writing off a receipt that didn't didn't go off of the petty cash. But in any case, this could flip to a credit balance or a debit balance. And in this case, it's going to flip back down. It had a credit balance of 11.50. We had a $35 debit bringing it down by the 11.50 to zero and then back in the debit direction to 23.50 in this account. And then the cash accounts going to go from 1,824.17 down by the 161.61, which were actually were are physically writing a check for or taking money out of the checking account for bringing the balance down to 1,662.56. Nothing happened to the petty cash fund, even though we're dealing with the petty cash fund, because it's already at the balance that we want. And instead of doing that two step process, we're just going to do a one step process taking the money out of the checking account physically, taking it out of the checking account putting it back into the drawer, the drawer only having 288.39 needing that 161.61 to get back up to the balance that we already have recorded a 450. And then we're recording the expenses here that we had done during the month into our system. So if we see the whole thing here, here's here's all the accounts. Of course, all of these debits to the expenses are going to decrease net income because net income is calculated as revenue has a credit balance minus all the expenses, the expenses went up. So net income went from 4,674.17 income, not a loss. This is income credits beating the debits. It went down by 161.61 to 4,512.56. So of course, we are recording the fact that we made expenditures during the month decreasing net income.