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.
But what is petty cash in accounting? Do you have to record these transactions on financial statements? Let’s take a closer look.
Petty cash typically goes anywhere from $10 to $500. Employees use this money for small quick payments: To pay for taxi fares in emergency cases, tip the delivery guy, buy flowers or cards for someone’s birthday, or snacks for employees working overtime.
These small expenses, however, are a nuisance for the accounting team to deal with, which is why in some companies, it’s the employees who are purchasing, say, milk for coffee or staples for the office. However, expecting employees to pay for such expenses out of their own pockets is not a laudable practice and can justly cause employee dissatisfaction. That’s why a petty cash fund should be established to cover any expenses that are too small or impractical to be covered through the company’s account.
Typically, companies that set up a fund (or funds, if the company is large, with many departments) also appoint someone to handle and monitor it. This person - the petty cash custodian - is in charge of managing petty cash, saving the receipts, and making out slips, and attaching them to the receipts to ensure that no money goes unaccounted for. Restricting access to the fund lowers the chance of theft or misuse.
So, how do petty cash transactions work in a company setting?
Every time a certain amount of petty cash is spent, the fund custodian should save a receipt. On a petty cash slip, the custodian can add the purpose and the date when the cash was spent or any additional information, depending on the company’s policy, and attach it to the receipt. Once the fund is depleted, the custodian will hand over the receipts to the petty cash cashier - the person in charge of replenishing the fund by issuing petty cash checks - and receive new funds in exchange for them.
Since, by definition, petty cash is still a company’s funds, it, too, has to appear on financial statements. However, unlike other transactions, individual purchases made with petty cash are not recorded - instead, entries are made when the fund custodian needs more cash and provides the receipts to account for the previously spent money. The idea, of course, is to simplify the whole process of accounting for petty cash since, instead of making entries for dozens of small transactions, the accountant only has to deal with these in bulk, every once and a while.
Petty cash accounting, also known as reconciling the ledger, usually happens once a month, although some companies do it weekly. The petty cashier will subtract the remaining amount from the starting amount to determine how much was spent since the last reconciliation of the ledger.
If, after adding up all the receipts, the total doesn’t match the sum of the disbursed funds - if there is a shortage or an overage - this is a signal that an error occurred. The matter should always be investigated, no matter how small the discrepancy. It could be a simple mathematical error or a more severe problem. A shortage of petty cash can, for example, be the result of a theft, which is more likely if more than one person has access to the petty cash drawer.
Replenishing petty cash is usually scheduled at the end of an accounting period. The cashier should bring the receipts to the accounting team (if the company is a large one and has an accounting team) or enter the totals into one of the free accounting programs available for download that small businesses rely on. Accountants typically log this into the general ledger both as credits to the petty cash account and debits to expense accounts.
Petty cash is typically replenished by a company-issued check. Accounting records replenishing the petty cash fund as a debit to the petty cash and credit to the cash account.
Petty cash, like everything in life, has its pros and cons. It’s effective as quick money to handle small and unexpected expenses and saves plenty of time because it doesn’t require planning in advance or authorization.
On the other hand, petty cash is hard to keep track of, and it’s prone to misuse. There is always someone who needs to be in charge of the fund. 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 is a perfect solution for small purchases and minor expenses. In comparison to using the company’s account to pay for these and flooding the accounting team with receipts, it’s much faster and more effective.
However, with plenty of other choices technology gives to modern companies, managing such a fund can quickly become a nuisance. It’s no wonder that this practice is now rare, and many young people in the workforce ask themselves, “What is petty cash in accounting?”
Companies that set up a fund with petty cash typically assign a person to handle it - disburse funds when needed, collect receipts, and make sure there is always enough money left in the fund. This person is known as the fund custodian. The person who receives the receipts from the fund custodian and issues checks to replenish the fund is called a petty cash cashier. Ultimately, it’s the accounting team’s responsibility to include these expenses in the general ledger.
Petty cash is a small amount of money (typically, no more than $500) that a company’s employees can use to cover minor expenses, such as, for example, the costs of milk for coffee or birthday cards.
When a company sets up a fund with petty cash, it typically assigns an employee to oversee the fund. This person handles all purchases made with petty cash and collects receipts. At the end of the week or month, the amount of all receipts is totaled, and that sum is entered in the ledger. A new check is then issued to replenish the fund. Accountants record the petty cash replenishment as a debit to the petty cash and credit to the cash account.
For more details on how petty cash transactions are recorded in accounting, read our “What Is Petty Cash in Accounting?” article.
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