What is Petty cash? Accounting Reconciliation. Advantages

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. Many of your business expenses are tax deductible, including purchases made with your petty cash fund. You must document each expense if you want to deduct it from your business taxes. If you don’t document your petty cash purchases, you will not be able to deduct the expenses when you pay business taxes. You might debit multiple accounts, depending on how often you update your books for petty cash accounting.

• Monitor and analyze user performance, ensuring key actions quickly.
• In accounting, the cash held by a business for this purpose is called petty cash.
• Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

This is the total petty cash expenditure for the week, and, when deducted from the original imprest amount of $20.00, leaves a balance of $2 petty cash in hand at the end of the week. This is known as the imprest system and is commonly used in business. The container should include all the petty cash vouchers that will be issued to https://accounting-services.net/present-value-of-annuity/ support any cash movements (we will look at petty cash vouchers later in this unit). Not surprisingly, petty cash funds are vulnerable to misuse and could even lead to outright fraud. Since our founding in 2001, BlackLine has become a leading provider of cloud software that automates and controls critical accounting processes.

How To Do Petty Cash Accounting & Recording in 6 Steps

These errors cause the cash in the fund to be more or less than the amount of the fund less the total vouchers. The Cash Over and Short account can be either an expense (short) or a revenue (over), depending on whether it has a debit or credit 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. When your petty cash cashier puts money into the petty cash fund, they must create a journal entry in your books. The entry must show an increase in your Petty Cash account and a decrease in your Cash account. To show this, debit your Petty Cash account and credit your Cash account.

For proper administration and accounting of the petty cash account, the custodian should maintain a log of all disbursements. The log will allow for proper reconciliation of the account at the end of the reporting period when financial statements are prepared. The petty cash balance should be sufficient to support the amount of activity expected in the account, and will typically be Petty cash accounting a reflection of the size of the company. Small businesses are just as likely to have a petty cash fund as a large corporation, but the total amount in the fund will vary. Also under the imprest system, a balance is predetermined for the petty cash fund. Cash is allocated to the fund in that amount from the company’s checking account, and the balance is maintained as purchases occur.

When Is It Most Appropriate to Use Petty Cash?

The petty cashier is always assumed to hold cash equal to the imprest account in the form of actual cash or paid-up PCVs. There are different ways of tracking transactions in a petty cash book. Some organizations use a separate cash register for the petty cash, and others just track the transactions on ordinary receipts or invoices. How you track your costs does not matter as long as it is consistent. At the end of the month, assume the $100 petty cash fund has a balance of $6.25 in actual cash (a five-dollar bill, a one-dollar bill, and a quarter).

However, for the payment of small expenditures (e.g., stationery, travel, postage, and newspapers), paying by check is unreasonable. In any given month, a custodian will make various disbursements from the petty cash fund. A petty cash fund is established by transferring a specified amount of cash from the general checking account to a person who is given custodial responsibility for the fund. It is also appropriate for companies to either keep their petty cash in just one office or the main office of each division of the company.

Simple Petty Cash Book

Note that it’s a good idea to set a maximum dollar amount for allowable expenses. When you put money into the fund, you must create a journal entry debiting your Petty Cash account and crediting your Cash account. You (or your petty cash cashier) must also create journal entries showing what petty cash funds go toward. To improve the way you handle petty cash accounting, require a petty cash receipt for each transaction. And, create a petty cash slip indicating the amount, employee’s name, and date when you give employees petty cash. When you or employees pay with petty cash, retain the receipt and attach the petty cash slip to the receipt for your records.

The petty cash custodian refills the petty cash drawer or box, which should now contain the original amount of cash that was designated for the fund. The cashier creates a journal entry to record the petty cash receipts. This is a credit to the petty cash account, and probably debits to several different expense accounts, such as the office supplies account (depending upon what was purchased with the cash). The balance in the petty cash account should now be the same as the amount at which it started. When a petty cash fund is in use, petty cash transactions are still recorded on financial statements. The journal entry for giving the custodian more cash is a debit to the petty cash fund and a credit to cash.

Definition of Petty Cash

When the petty fund is replenished, usually by drawing on a company-issued check, it’s recorded as a debit to the petty cash account and a credit to the cash account. When the cash balance in the petty cash fund drops to a sufficiently minimal level, the petty cash custodian applies for more cash from the cashier. This takes the form of a summarization of all the receipts that the custodian has accumulated. The cashier creates a new check in the amount of the receipts, and swaps the check for the receipts. The petty cash journal entry is a debit to the petty cash account and a credit to the cash account. Petty cash is a current asset and should be listed as a debit on the balance sheet.

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