One of the conveniences of the petty cash fund is that payments from the fund require no journal entries at the time of payment. Thus, using a petty cash fund avoids the need for making many entries for small amounts. Only when the fund is reimbursed, or when the end of the accounting period arrives, does the firm make an entry in the journal. On the other hand, if the company has a cash shortage in the petty cash fund, it can make the journal entry with the debit of cash over and short account instead.

However, the company still needs to account for the cash overage or shortage with a proper journal entry in order to match the balance on the debit with the balance on the credit in the accounting system. After calculation, even though the total petty cash expenses are only $82 ($45+$25+$12), we need to replenish $85 ($100-$15) as we have only $15 cash on hand left. Likewise, the $3 difference is the cash shortage that we need to recognize as a small loss. To illustrate, we will close the $100 original petty cash fund by returning the cash to the checking account with a debit to cash and a credit to petty cash. The cash over and short account is used when an imprest account, such as petty cash, fails to prove out.

• Note that the entry to record replenishing the fund does not credit the Petty Cash account.
• By assigning the responsibility for the fund to one individual, the company has internal control over the cash in the fund.
• Additionally, this account is usually included in the other expenses or other revenues when we prepare the income statement at the end of the accounting period.
• The Cash Over and Short account will be used to balance the entry when the cash needed to get back to the petty cash account does not match the total of petty cash vouchers.

Opposite to the cash shortage, cash overage occurs when the cash we have on hand at the end of the day is more than the cash sales. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Generally, the amounts in the account Cash Short and Over are so small that the account balance will be included with other insignificant amounts reported on the income statement as Other Expenses. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Also, the expenses in this journal entry are usually the expenses with a small amount such as postage expenses and freight expenses, etc. As you think back on this system, note that there are several internal controls in place, most notably segregation of duties, assignment of responsibility, and a reconciliation (monitoring) process.

Journal entry for cash shortage

This system simply delays the recording of small expenses until the end of the accounting cycle or the fund is replenished. It’s not really an adjusting journal entry because there is an actual transaction being recorded. Having a petty cash account is  just more convenient than going to the accounts payable clerk every time someone needs a stamp or a liter of coffee for a meeting.

Sometimes, the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users. These errors cause the cash in the fund to be more or less than the amount of the fund less the total vouchers. When the fund is replenished, the credit to Cash is for the difference between the established amount and the actual cash in the fund. The Cash Over and Short account can be either an expense (short) or a revenue (over), depending on whether it has a debit or credit balance. In this case, we need to make the journal entry for cash shortage at the end of the day or when we make the replenishment of petty cash if there is less cash on hand than the amount it is supposed to be. Note that the entry to record replenishing the fund does not credit the Petty Cash account.

Cash over and short journal entry

The cash shortage may happen often with the retail business as it deals a lot with small notes when making the sales and the cash sales are usually need to be reconciled daily. Meanwhile, other types of businesses usually only have a cash shortage when dealing with the petty cash when it is needed to be replenished (usually once a month). Usually one individual, called the petty cash custodian or cashier, is responsible for the control of the petty cash fund and documenting the disbursements made from the fund. By assigning the responsibility for the fund to one individual, the company has internal control over the cash in the fund. Alternatively, if there had been too much cash in the petty cash box (a rare condition indeed!), the entry would be reversed, with a debit to cash and a credit to the cash over and short account.

Cash shortage in retail business

• At all times, the employee responsible for petty cash is accountable for having cash and petty cash vouchers equal to the total amount of the fund.
• To determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure.
• Also, the expenses in this journal entry are usually the expenses with a small amount such as postage expenses and freight expenses, etc.
• He finds that the box contains $45 of cash and $135 of receipts, which totals only $180.
• A larger balance in the account is more likely to trigger an investigation, while it may not be cost-effective to investigate a small balance.

After the check is cashed, the petty cash custodian normally places the money in a small box that can be locked. We will not use the petty cash in a journal entry again unless we are changing this original amount. The cash over and short account is the type of miscellaneous account in the income statement. If its balance is on the debit side, it is usually presented in the miscellaneous expenses. On the other hand, if its balance is on the credit side, it will be presented as miscellaneous revenue instead. The account stores the amount by which the actual ending cash balance differs from the beginning book balance of cash on hand, plus or minus any recorded cash transactions during the period.

Sometimes the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users. For cash overage in petty cash, we can make the journal entry with the debit of the expense accounts and the credit of the cash over and short account and the cash account when we replenish the petty cash. the petty cash account cash short and over is a permanent account. For example, on December 22, after reconciling the cash on hand with the cash sales, we find that there is a cash shortage of $5. The total amount of cash sales in the sales receipts is $2,790, however, the actual cash we have is only $2,785 (excluding the $100 cash prepared for small notes changes at the beginning of the day). This is probably due to there have been many transactions for our retail business as it is near holiday resulting in errors in our calculation.

AccountingTools

The account is typically left open until the end of a company’s fiscal year, when it is then closed and reported as a miscellaneous expense on the income statement. After posting to the ledger (we’ll use T accounts here), the checking account balance will go down by $100 and the petty cash balance will go up by $100. Both of these numbers reflect reality and you could verify them by (a) reconciling the bank statement to the checking account in the general ledger and (b) by looking in the cash box and counting the money in there.

For example, fraud situations may be traced back to the people directly responsible for a cash register or petty cash box. For example, assuming that there is a $5 cash overage instead when we replenish the petty cash in example 2 above, which results in the petty cash reconciliation looking like the below table instead. For example, at the end of the month, the receptionist of the company ABC needs to request reimbursement to refill the petty cash fund of $100. The primary use of the cash over and short account is in cash-intensive retail or banking environments, as well as for the handling of petty cash. This information is then used to track down why cash levels vary from expectations, and to eliminate these situations through the use of better procedures, controls, and employee training. In this case, when we replenish the petty cash, we just need to refill $77 ($100 – $23) as we still have $23 remaining in petty cash.

We make entries to the Petty Cash account only when the fund is established or when the amount of the fund is changed or when the fund is closed and we want to add back cash in exchange for the petty cash vouchers. In this case, the cash needed to get back to $100 ($100 fund – $7.40 petty cash on hand) of $92.60 equals the total of the petty cash vouchers. For another example, on January 31, we need to reconcile the petty cash expenses and replenish the petty cash to its full established petty cash fund. The Cash Over and Short account will be used to balance the entry when the cash needed to get back to the petty cash account does not match the total of petty cash vouchers.

For example, the petty cash custodian may sometimes find themselves having less cash on hand as a result of the total cash plus receipts does not add up to the total amount of the established petty cash fund. Assume that the company has a petty cash fund of $100 and its general ledger account Petty Cash reports an imprest balance of $100. Let’s now assume that when the petty cash fund is replenished, there is $6.00 on hand and there are $93.00 of petty cash vouchers. When the company has the cash overage in the petty cash fund, it can make the journal entry by debiting the expenses account and crediting the cash over and short account together with the cash account. In accounting, cash over and short journal entry is usually made when the company replenishes its petty cash fund. This is due to the cash remaining and the receipts in the petty cash box may not equal the amount of petty cash fund established.

In this case, we can make the journal entry for cash shortage by debiting the cash account and the cash over and short account and crediting the sales revenue account. Additionally, this account is usually included in the other expenses or other revenues when we prepare the income statement at the end of the accounting period. A miscellaneous expense account used to record the difference between the amount of cash needed to replenish a petty cash fund and the amount of petty cash receipts at the time the petty cash fund is replenished. The term cash over and short refers to an expense account that is used to report overages and shortages to an imprest account such as petty cash. The cash over and short account is used to record the difference between the expected cash balance and the actual cash balance in the imprest account.

Journal Entry for Cash Shortage

Likewise, it can save us a bit of time and effort by including both cash shortage and cash overage into only one account. The cash over and short account is an expense account, and so is usually aggregated into the “other expenses” line item in the income statement. A larger balance in the account is more likely to trigger an investigation, while it may not be cost-effective to investigate a small balance. A sample presentation of the Other Expenses line item in an income statement appears in the following exhibit.

In the next section, we’ll look at one of the most important cash controls, the bank reconciliation process, in detail. The account Cash Short and Over provides a way to monitor employees’ cash handling proficiency. This account also provides companies with the ability to monitor the handling of cash, since it can apply to tellering operations too.

In this journal entry, we credit the sales revenue because in the retail business the cash shortage usually happens due to us failing to keep the accurate records that are related to sales revenue. Also, the debit of cash over and short represents the loss, e.g. a few dollars, due to the cash being less than the amount it is supposed to be when comparing the sales records. The custodian should prepare a voucher for each disbursement and staple any source documents (invoices, receipts, etc.) for expenditures to the petty cash voucher. At all times, the employee responsible for petty cash is accountable for having cash and petty cash vouchers equal to the total amount of the fund. At the end of the month, assume the $100 petty cash fund has a balance of $6.25 in actual cash (a five-dollar bill, a one-dollar bill, and a quarter). Frank, who is the responsible person, has been filling out the voucher during the month, and all the receipts are stapled to the voucher.

The journal entry to record replenishing the fund would debit the various accounts indicated by the summary and credit Cash. Right after this entry has been recorded, the check cashed, and the proceeds put in the box, there will be $100 in the box again, an amount which will match the general ledger account. In fact, there is always $100 in the box if you add up all the receipts and the cash (more or less, depending on the cash over/short situation).