Let's illustrate the Cash Short and Over account with the 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 petty cash receipts indicating that $93.00 were disbursed. These two amounts indicate there is a shortage of $1.00. (The custodian started with cash of $100 and has documents showing that $93 was disbursed. Therefore, the custodian should have $7 on hand—not $6.)
Using the above information, the journal entry to replenish the petty cash fund will include a credit to Cash-Checking Acct for $94. (This is the amount needed to get the petty cash on hand back to the imprest general ledger amount of $100.) The debits will be the accounts and amounts shown on the petty cash receipts, which total $93. To get the journal entry to balance, there needs to be another debit for $1 and it will be recorded in Cash Short and Over.
A debit in Cash Short and Over represents an expense. In our example, the company will have an expense of $1, since there was a cash shortage of $1. A credit to Cash Short and Over indicates that there was more cash on hand than was expected. In other words, a credit to Cash Short and Over represents a revenue.
If petty cash custodians and bank tellers were perfect money handlers, there would never be an entry to the account Cash Short and Over. The Cash Short and Over account provides an organization with a mechanism for monitoring its cash handling proficiency.
The balance in Cash Short and Over is reported on the income statement. If the balance is insignificant, the account balance will likely be reported as part of miscellaneous expense.
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