Petty cash is a small amount of money that companies keep available for minor daily payments, which are inconvenient to make by writing a check. Cash, in many cases, remains the quickest, simplest, easiest way to pay for things. It works well to cover small impromptu expenses—like a tip for the kid delivering pizzas to the lunch meeting, or cab fare home for employees working late. It saves the hassle of reimbursing people or expecting them to pay out-of-pocket for work-related items.
- Many bookkeepers prefer to combine the second and third journal entries above if the cash is replenished at the same time as expenses are recorded, which is generally the best practice.
- The best way to control the account is to designate one person in the office to be responsible.
- To determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure.
- The petty cash custodian is the person accountable for the petty cash fund.
By assigning the responsibility for the fund to one individual, the company has internal control over the cash in the fund. Someone must check the account periodically so the balance doesn’t get too low. When the petty cash drawer gets below a pre-set amount that you determine, add to the drawer by writing a check to “Petty Cash” and cashing that check.
Do: specify what it can be spent on
There is no journal entry at this point; instead, the cash balance in the petty cash fund continues to decline, while the number of receipts continues to increase. The total of the receipts and remaining cash should equal the initial amount of petty cash funding at all times. However, recordation errors and theft may result in a variance from the initial funding amount.
Replenishing petty cash is usually scheduled at the end of an accounting period. Accountants typically log this into the general ledger both as credits to the petty cash account and debits to expense accounts. As part of a company’s cash, a petty cash fund is drawn on its checking account, cashing that check and giving the currency and coins to the custodian. If money from the fund is used for expenses, the custodian will use petty cash receipts or vouchers to replace that cash. When the fund is replenished, the expenses will be recorded in the general ledger.
Definition of Petty Cash
In the upper right portion of the window, click the green New button to create a petty cash account. If you need help getting a petty cash log started, look up some free petty cash log templates to do some of the work for you. Keeping a small amount of cash in your office or at your store makes it much easier for office managers, bookkeepers, and supervisors to cover occasional small purchases or expenses. Nowadays, software like Connecteam can be key in monitoring the use of petty cash to ensure the practice isn’t misused and that the numbers balance at the end of the day. Even though most instances of petty cash use a rather insignificant amount of money, there is a need to monitor it closely because it can add up to a significant amount over time.
The most important part of a petty cash system is the documentation of each transaction. Documenting transactions is the way a business documents business expenses for tax purposes. By keeping track of all petty cash transactions – no matter how petty- you have records to back up deductions for those small business expenses. The petty cash custodian will keep all petty cash items inside a lockbox. Only the custodian can access the lockbox—and it mustn’t be left opened and unattended. Having a petty cash fund speeds up reimbursements and is an important best practice in cash management.
Frequently Asked Questions About Petty Cash
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Petty Cash Accounting Example
Even if you trust your employees, cash left out on a table or desk could be stolen by an office visitor or a customer. To combat this risk, keep the petty cash in a locked filing cabinet or cash box. Only you and the employee designated to oversee the fund should have the keys. Ideally, people in this role will be comfortable handling business expenses and have experience with financial statements.
The currencies inside the lockbox should be equal to the ending balance. Every month, or as cash is needed, the custodian should summarize the petty cash log by expense account and record a journal entry debiting each expense and crediting petty cash. On the other hand, petty cash is hard to keep track of, and it’s prone to misuse. Additionally, for smaller companies that don’t have an extensive accounting team and use accounting software instead, managing a petty cash fund can be a time-consuming task. Petty cash appears within the current assets section of the balance sheet. This is because line items in the balance sheet are sorted in their order of liquidity.