Journal Entry for Cash Shortage

Overview

It is a normal occurrence to have a bit of cash shortage after reconciling the cash receipt with actual cash at the end of the day for a retail business or at the end of the month when we need to replenish the petty cash fund. 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.

Cash shortage usually happens when the actual cash on hand received from sales is less than the total amount in sales receipts for the retail business. For other types of businesses, it usually occurs when the cash on hand, left after petty cash expenses, is less than the total amount in petty cash expenses receipts.

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).

In accounting, usually, only one account, e.g. cash over and short account, is used to record the cash shortage as well as the cash overage as both cash shortage and cash overage is the discrepancy of cash that is usually small in amount and is immaterial. Likewise, it can save us a bit of time and effort by including both cash shortage and cash overage into only one account.

Journal entry for cash shortage

Cash shortage in retail business

For a retail business, the cash shortage usually happens when the cash on hand (excluding the cash prepared for small notes changes at the beginning of the day) that we have is less the cash sales when we perform the cash count at the end of the day. This usually happens when we make mathematical errors during the day of the sales.

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.

Account	Debit	Credit
Cash	000
Cash over and short	000
Sales revenue		000

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 normal balance of cash over and short account cannot be said to be on the debit side or credit side as this account include both cash shortage and cash overage, in which one represents a small loss and another represents small gain. 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.

Cash shortage in replenishment of petty cash

For other types of businesses, the cash shortage usually happens when dealing with petty cash. 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.

In this case, we can make the journal entry for cash shortage by debiting the expense accounts that are matched to the receipts and the cash over and short account and crediting the cash account to replenish the petty cash to the total amount of the established fund.

Account	Debit	Credit
Expenses	000
Cash over and short	000
Cash		000

In this journal entry, the credit of the cash account is to refill the petty cash fund to its full established petty fund. At the same time, it also represents the cash outflow from the company as a result of petty cash expenses during the period. That is why we debit the expenses account in the above journal entry.

Also, the expenses in this journal entry are usually the expenses with a small amount such as postage expenses and freight expenses, etc.

Cash shortage example

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.

In this case, we can make the journal entry for cash shortage of $5 when we record the sales receipts into our accounting record by debiting the $5 into the cash over and short account as below:

Account	Debit	Credit
Cash	2,785
Cash over and short	5
Sales revenue		2,790

Example 2:

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. However, after counting the cash on hand, we find that the total cash remaining plus the total amount in petty cash expenses receipts does not equal the $100 of the established petty cash fund as there is a $3 short.

The petty cash reconciliation with receipts that we have made is as below:

Name	Amount
Freight expense	$45
Postage expense	$25
Other small expenses	$12
Petty cash on hand	$15
Cash shortage	$3

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.

In this case, we can make the journal entry for cash shortage when we make the replenishment of the petty cash on January 31 by recording the $3 cash shortage as below:

Account	Debit	Credit
Freight expense	45
Postage expense	25
Miscellaneous expenses	12
Cash over and short	3
Cash		85

Journal entry for cash overage

Cash overage in retail business

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.

In this case, we can make the journal entry to record the cash overage by debiting the cash account and crediting the cash over and short account and the sales revenue account.

Account	Debit	Credit
Cash	000
Cash over and short		000
Sales revenue		000

For example, assuming that we have a cash overage of $10 instead in example 1 above, as a result of having actual cash on hand of $2,800 which is more than the cash receipts of $2,790.

In this case, we can make the journal entry to record the $10 cash overage by crediting this $10 amount to the cash over and short account as below:

Account	Debit	Credit
Cash	2,800
Cash over and short		10
Sales revenue		2,790

Cash overage in replenishment of petty cash

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.

Account	Debit	Credit
Expenses	000
Cash over and short		000
Cash		000

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.

Name	Amount
Freight expense	$45
Postage expense	$25
Other small expenses	$12
Petty cash on hand	$23
Cash overage	$5

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.

Hence, we can make the journal entry to record the $5 cash overage in the replenishment of petty cash as below instead:

Account	Debit	Credit
Freight expense	45
Postage expense	25
Miscellaneous expenses	12
Cash over and short		5
Cash		77