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. <\/p>\n\n\n\n
But what is petty cash in accounting? Do you have to record these transactions on financial statements? Let\u2019s take a closer look.<\/p>\n\n\n\n
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\u2019s birthday, or snacks for employees working overtime. <\/p>\n\n\n\n
These small expenses, however, are a nuisance for the accounting team to deal with, which is why in some companies, it\u2019s 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\u2019s why a petty cash fund should be established to cover any expenses that are too small or impractical to be covered through the company\u2019s account.<\/p>\n\n\n\n
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<\/a>, 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. <\/p>\n\n\n\n So, how do petty cash transactions work in a company setting?<\/p>\n\n\n\n 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\u2019s 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.<\/p>\n\n\n\n Since, by definition, petty cash is still a company\u2019s 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.<\/p>\n\n\n\n Petty cash accounting, also known as reconciling the ledger<\/a>, 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. <\/p>\n\n\n\n If, after adding up all the receipts, the total doesn\u2019t 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. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n Petty cash, like everything in life, has its pros and cons. It\u2019s effective as quick money to handle small and unexpected expenses and saves plenty of time because it doesn\u2019t require planning in advance or authorization. <\/p>\n\n\n\n On the other hand, petty cash is hard to keep track of, and it\u2019s prone to misuse. There is always someone who needs to be in charge of the fund. Additionally, for smaller companies that don\u2019t have an extensive accounting team and use accounting software<\/a> instead, managing a petty cash fund can be a time-consuming task.<\/p>\n\n\n\n Petty cash is a perfect solution for small purchases and minor expenses. In comparison to using the company\u2019s account to pay for these and flooding the accounting team with receipts, it\u2019s much faster and more effective. <\/p>\n\n\n\n However, with plenty of other choices technology gives to modern companies, managing such a fund can quickly become a nuisance. It\u2019s no wonder that this practice is now rare, and many young people in the workforce ask themselves, \u201cWhat is petty cash in accounting?\u201d<\/p>\n\n\n\n Petty cash is a small amount of money that companies …<\/p>\nReplenishing and Reconciling Petty Cash<\/strong><\/h3>\n\n\n\n
Pros and Cons of Petty Cash<\/strong><\/h3>\n\n\n\n
The Bottom Line<\/strong><\/h3>\n\n\n\n
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