In a company, writing a check for every single expense is an arduous task and is not entirely possible. That is why paying through a small amount of cash is a much easier option for minor expenses like office supplies, meals, etc. The petty cash balance is present on the company balance sheet with cash in the bank and cash on hand. Which can aid employers in reimbursing employees and clients for small expenses. While a petty cash fund may not be necessary if you work solo, if you have even one employee, it may be worth it to set up a petty cash fund to manage those unexpected expenses properly.
Accountants record the petty cash replenishment as a debit to the petty cash and credit to the cash account. The petty cash custodian then disburses petty cash from the fund in exchange for receipts related to whatever the expenditure may be. There is no journal what is the journal entry if a company pays dividends with cash 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.
While petty cash funds only take care of small expenses, these funds still need to be managed correctly. Keeping track of these petty cash expenses helps you to capture all your tax-deductible expenses. After the owner or bookkeeper records all expenses in the books, cash must be taken from the checking account to replenish the petty cash box. Record the transfer of cash by debiting Petty Cash and crediting Checking Account. The bottom portion of the petty cash log won’t be completed until the cash in the lockbox needs to be replenished. There’s no need to make journal entries when expenses are reimbursed from cash in the lockbox.
When and how to use petty cash
For example, if a company sets their petty cash fund at $100, and $75 is spent, the custodian should possess $25 in cash and receipts adding to $75, hence balancing the petty cash fund. 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).
Therefore, during the reconciliation process, the receipts and remaining cash in the box must equal the original petty cash amount. The petty cashier will be responsible for the petty cash drawer and making the right accounting entries. Additionally, the petty cash custodian is also responsible for distributing the cash and collecting bills and receipts for all expenses caused by the petty cash. The best way to record these expenses is by collecting petty cash receipts. These receipts should match the replenishment of funds within the recorded periods.
- This could be in the form of cash in bank accounts, debt instruments, and other sources of cash.
- In departments where the separation of duties is not feasible, strict individual accountability and thorough management supervision and review is required.
- 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.
- In larger corporations, each department might have its own petty cash fund.
- Since the amount involved is usually small, petty cash can be used immediately by employees who are previously authorised.
The use of a petty cash fund can circumvent certain internal controls. However, the availability of petty cash doesn’t mean that it can be accessed for any purpose by any person. Often, a few individuals are authorized to approve disbursements and can only do so for expenses related to legitimate company activities or operations. Lastly, you must regularly review and reconcile your petty cash funds. Be sure to investigate and review any discrepancies as soon as they are discovered. Most companies tackle the handling of petty cash with a petty cash log book of sorts.
Setting Up Your Petty Cash Fund
Even though a petty cash system is (as the name suggests) cash-based, it still requires the full-blown accounting treatment. This means that petty cash undergoes reconciliation periods just like other expenses do. If small businesses don’t understand how to handle it properly, problems will eventually arise, such as theft. What if you could, with a single tool, safely distribute and efficiently track all your branch petty cash expenses and prevent cash leakage?
How to keep your petty cash book tidy
So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills. 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. Recording and tracking your petty cash and credit card spending with the same software will mean that all expenses are in a centralised place. This makes it much easier for your finance department analysts to spot spending patterns and make a new (and improved) strategy. Petty cash vouchers, receipts and notes about purchases must all go into the book, which can sometimes lead to a mess of documents spilling out of the book.
QuickBooks Support
The petty cash journal entry is a debit to the petty cash account and a credit to the cash account. 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. The person who receives the receipts from the fund custodian and issues checks to replenish the fund is called a petty cash cashier.
Replenishing and Reconciling Petty Cash
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. 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.
Even though the cash economy is getting smaller, there is still often a need to reimburse employees or to quickly pay a delivery driver. A petty cash fund allows a small amount of cash to be kept in a convenient place for miscellaneous expenses. When a minor expense arises, the business can use petty cash instead of issuing an official company check. The convenience of petty cash enables easier tracking of small expenditures and reduces administrative burden. When it’s time to record expenses, such as the end of the month, go back to the Petty Cash Register and click Add Expense.
Petty cash vs cash on hand: what’s the difference?
Petty cash is a small amount of cash a company keeps on hand to cover small expenses. Companies sometimes do this to avoid using a credit card or writing a check. If you’re ready to set up a petty cash fund for your office but aren’t sure where to begin, follow the simple steps below to have your petty cash fund operational in no time.
This way, when you need to double check a receipt or find a petty cash voucher from the past, it won’t take days and days. Since only small purchases are made, there tends to be a huge lack of attention on it. This makes petty cash susceptible to errors and fraud that could be left undiscovered for months on end. All petty cash is considered an asset and counts towards cash on hand, but not all cash on hand is petty.
Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If you find yourself going through petty cash rapidly, you can increase the amount of petty cash you keep on hand.