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Petty cash is money that is kept on hand for a business. It is used to pay  for smaller, incidental expenses like employee reimbursements or office supplies. Monies that go in and out of a petty cash fund must be accounted for and recorded. Also, there are periodic reconciliations for petty cash funds. In larger organizations, each department may have its own designated petty cash fund. 

What is Petty Cash?

Having petty cash available is a convenience for businesses. Oftentimes, small transactions need to be made, and it is not reasonable or acceptable to issue a check or use a corporate credit card. Businesses vary in the amount of petty cash they keep on hand. Some companies keep between $100 and $500 in their petty cash fund.

The term “Petty” is an English term derived from the French word “petit,” which means small or little. Petty can also mean insignificant or minor. Petty cash then, is a small amount of money that is set aside for little purchases as opposed to large bills or expenses.

What Expenses are Covered by Petty Cash?

Petty cash funds cover small expenses that may pop up on a normal business day. Some examples include purchasing cards for customers, reimbursing an employee $4 for office supplies they purchased or paying the mail carrier 50 cents for postage due. The guidelines for spending out of the petty cash fund will be determined by managerial staff. 

What Type of Account is the Petty Cash Fund?

Petty cash funds can be classified as different types of accounts. It is a cash account, as well as a current asset. It’s also known as an imprest account.

  1. Current Asset: Petty cash is classified as a current asset, and it is listed as a debit on the company’s balance sheet. Usually, a check is issued to “Petty Cash” to keep the specified amount of cash on hand.
  2. Cash Account: Once the check is cashed at the bank, the cash is placed in a safe location such as a locked drawer or cabinet. When a receipt is reimbursed using cash from the petty cash account, the receipt is placed in the drawer so the cash can be properly accounted for.
  3. Imprest Account: Petty cash is the most well-known of imprest accounts as it uses cash-on-hand to cover small transactions. Cutting a company check for smaller purchases is not reasonable.

How Do You Account for Petty Cash?

To account for petty cash, a log is created to detail transactions. Every time money goes into or leaves the petty cash fund; a journal entry is made. The petty cash log includes details for anything that is purchased, how much the purchase cost, when it was purchased, and which account was affected. Also included is which employees received and spent the funds. 

Create a journal entry for each time petty cash is placed into the petty cash fund. The entry should show the increase in the Petty Cash account and a decrease in the cash account. To show this transaction, the petty cash account is debited, and the cash account is credited. When petty cash funds run low, they must be refilled to their predetermined amount. At this point, create an entry that debits the petty cash account and credits the cash account.

How Should Petty Cash Be Handled?

Determining how to handle petty cash accounts helps ensure the funds are used appropriately. Without a system for handling petty cash funds, companies are vulnerable to theft. Managing a petty cash account provides oversight and makes it easier to enter the expenses in a bookkeeping system. Setting it all up is easy.

  • Appoint a Petty Cash Custodian. Assign one person who is responsible for overseeing the funds. The custodian shouldn’t be the same individual who records petty cash transactions in the company’s general ledger.
  • Put the designated funds in the account. Cash a check that is written for the amount you want to maintain in petty cash funds. It can be any amount that makes sense for your business.
  • Secure the money in a locked drawer or file cabinet. Funds should always be secured in a locked location. Only the custodian and the business owner should have access. 
  • Establish handling policies. Create guidelines for using petty cash. Set a maximum disbursement, and determine what types of expenses are covered.
  • Record all disbursements. Record keeping is essential to managing petty cash.
  • Require receipts for every transaction. Even though the monetary amounts are small, receipts should be required as a way to track and monitor spending. 
  • Replenish funds when they run low. The petty cash fund should be balanced. When funds are low, they should be replenished to cover incidental costs.
  • Monitor spending. Petty cash funds should be reviewed regularly to ensure they are used for preapproved expenditures. 
  • Regularly reconcile the account. Bookkeepers and accountants should register petty cash transactions in the general ledger. 

Each company will have to decide on the particulars pertaining to the use of its petty cash fund. In most instances, employees who make approved purchases will need to provide receipts for their purchases. Whether they are given cash in advance or bring in a receipt following a purchase, all the guidelines for handling petty cash should be clearly stated in writing so confusion is minimal.

Who is the Person in Charge of Petty Cash?

In most instances, an employee is appointed to be the custodian in charge of petty cash. The custodian is responsible for maintaining and documenting expenses that are taken from the petty cash. When they disburse funds from the petty cash account, the custodian writes out a petty cash receipt which is to be signed by the employee who receives the funds. 

A petty cash custodian doesn’t need to be an accountant. They do need to be responsible and trustworthy. The custodian does need to have a general knowledge of bookkeeping and record-keeping skills.

Where can Petty Cash be Kept?

The most common approach for storing petty cash is to assign an employee the role of a custodian. They are responsible for managing the petty cash. In most cases, the cash is kept in a money box inside a designated office. The primary concern is to keep the cash accessible to only the custodian and business owner or a manager. To keep theft to a minimum, the cash should be locked in a drawer, closet, or file cabinet. 

What are the Pros and Cons of Petty Cash?

Petty cash has been a much-used method for quick funds for purchases, especially small ones. Like other accounting methods, there are pros and cons. Here are a few advantages and disadvantages to help you determine if it is a helpful method or not.

Pros of Petty Cash Cons of Petty Cash
Easy to understand and familiar Purchases harder to track receipts
Convenient for small purchases Susceptible to abuse
Alternative to credit cards Can’t handle large expenditures
Minimizes mistakes Have to find a person to get cash

What Happens if the Petty Cash Fund is Over?

The petty cash fund should be reconciled periodically. Normally, this occurs at the end of the month. However, businesses may need to do it more or less often based on the flow of cash. The receipts are calculated to ensure that the total matches the funds that were dispersed from petty cash. The receipt total plus the cash left in petty cash should equal the monthly allotment for the account. If there is an overage, the discrepancy should be identified so that it can be corrected and the petty cash balance restored to the predetermined amount and accounting records adjusted.

What Happens if the Petty Cash Fund is Short?

If there is a shortage in the petty cash fund discovered during the reconciliation process,  an investigation should be conducted to determine where the error lies. No matter what caused the shortage, the funds will need to be topped back up to the predetermined levels for petty cash.

Why is Petty Cash Necessary for Businesses?

A properly managed petty cash account can provide businesses with many benefits. It is a convenient method for making smaller purchases, and it doesn’t need a lot of oversight. Petty cash is a great option for small purchases and minor emergencies. Once the SOP is in place, no setup is required. Cash is easier for employees to make small purchases. It’s also more convenient for everyone involved than working through the process of reimbursing employees. 

Petty cash is a simple alternative to issuing employees corporate credit cards. Employees cannot accidentally exceed approved spending amounts. Additionally, if the employee leaves, changing card authorization can be a headache.

Managing petty cash funds is easy and doesn’t need as much oversight as other types of accounts. For accountants and bookkeepers, it’s easier to record petty cash as a single transaction instead of needing to enter each of the small purchases made out of the account.

Is it Possible to Pay Wages with Petty Cash?

No. Petty cash is designed to cover minor purchases and incidentals. It should not be used for standard operating expenses. Items that should not be covered by petty cash include goods, services, wages, and salaries.

Is a Petty Cash Book Recordation of Petty Cash Expenditures?

Yes. A petty cash book is used to record each of the small expenses covered by petty cash funds. These are small expenses such as postage, office supplies, etc. A separate column is used for each expenditure type. 

Is Petty Cash Counted as Cash on Hand?

Even though they sound a lot alike, petty cash and cash on hand are two separate terms with two different definitions. However, they may overlap a bit. Petty cash is its own fund that refers specifically to physical money kept on hand for small expenditures. Cash on hand is a business and accounting term that refers to any cash and liquid funds accessible to the business.