Cash on hand for small or unexpected expenses
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What is Petty Cash?
Petty cash refers to a small amount of hard currency that a businesses will keep on hand to pay for miscellaneous and unexpected items, such as team lunches, birthday cakes, or office snacks. Petty cash is usually a relatively small amount, and is grouped with the general cash account on the balance sheet in current assets.
Obviously, companies don’t want lots of cash just sitting around in the office. The amounts vary between companies but may be anywhere from $50 to $500. This amount is usually spent over a period of a month or two, and is replenished when necessary.
As part of a company’s cash, a petty cash fund is drawn on its checking account, cashing that check and giving the currency and coins to the custodian. In this transaction, there’s no expense involved. 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.
Reconciliation Process
Reconciliation of the petty cash fund should be done periodically to ensure that the fund’s balance is correct. In reconciling the balances, the ending balance or remaining cash on the fund and all receipt charges should be equal to the original balance, which is usually carried over from the previous reporting period. The fund can be replenished back to the approved amount as required.
Internal Controls
No matter how large the balance is, it is important for companies to set up a good internal control system that keeps track of all cash inflows and outflows from the petty cash account. For example, anyone who requires such cash should be required to write their name, the date, time, and the specific amount and description of the transaction.
All these details are usually completed through a petty cash voucher/worksheet. These worksheets come in different forms but generally require similar information. The best way to control the account is to designate one person in the office to be responsible.
The petty cash voucher may look like this:
Related Readings
CFI offers the Financial Modeling & Valuation Analyst (FMVA)®certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
FAQs
A petty cash fund is a small amount of company cash, often kept on hand (e.g., in a locked drawer or box), to pay for minor or incidental expenses, such as office supplies or employee reimbursem*nts.
How do you solve petty cash? ›
How to reconcile petty cash
- Step 1: Ascertain fund balance. Start by counting the balance left over in your petty cash fund box or drawer. ...
- Step 2: Confirm documentation proofs. ...
- Step 3: Categorize and add withdrawals. ...
- Step 4: Check for 'Cash Over' or 'Cash Short' ...
- Step 5: Restore original balance. ...
- Step 6: Reconcile payments.
How Can Businesses Set Up A Petty Cash Management System
- Employing a Custodian.
- Finance the Petty Cash Account.
- Ensure That the Funds Are Secured.
- Set Up Policies for The Expenditure of Petty Cash.
- Log Every Petty Cash Disbursem*nt.
- Request For Receipts.
- Reload The Petty Cash Fund When It Is Running Low.
Petty cash funds should be properly secured at all times. Access to the funds should be restricted to one person (e.g., the petty cash custodian or a specified cashier). Cash on hand and receipts for disbursem*nts made should always equal the assigned amount of the petty cash fund.
What is petty cash examples? ›
Petty cash is a small amount of money a company keeps for small, incidental expenses. These minor payments include office supplies, stationery, meals, client lunch, stamps, etc. The number of petty cash funds could change depending on the organization's size.
How do you pass petty cash entry? ›
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. When the petty cash fund gets too low, you must refill it to its set amount.
What is the problem with petty cash? ›
While handling small amounts might seem easy, the reality often involves pesky problems like spend leakages, and fraud, causing more challenges for your finance team. Using physical cash or an employee's personal credit card for petty cash management can lead to issues like: Unauthorized spending.
What is the maximum amount of petty cash? ›
General. Petty Cash Fund: An amount of cash, not to exceed $500, held by a department or office to pay for incidental expenses. The fund needs to be replenished periodically (recommended monthly) as incidental expenses are incurred and reduce the amount of funds on hand.
What are the two types of petty cash? ›
There are two types of petty cash books that are most commonly used:
- Imprest petty cash book.
- Columnar or Analytical petty cash book.
You should compare the total amount of cash in the fund with the total amount of expenses recorded in the log, and identify and resolve any differences. You should also prepare a petty cash voucher, which is a document that summarizes the expenses and requests a reimbursem*nt from your main bank account.
Appoint a Custodian
The custodian will be the primary person in the organization responsible for managing the petty cash. Designating a custodian establishes accountability and reduces the incidence of error or fraud by minimizing the number of employees who have access to the cash in the fund.
Do you need receipts for petty cash? ›
You need to keep all of your receipts, petty cash vouchers (to fill in when payments are made from the tin) and a record of the 'top ups' i.e. the amount to top petty cash up at the end of a period.
Who should hold petty cash? ›
One person – the petty cash “custodian” – is responsible for tracking funds disbursed and replenishing the fund when needed. Some companies require receipts for disbursem*nt and others use petty cash vouchers from an office supply store to itemize how the money was spent and who spent it.
What is petty cash quizlet? ›
an amount of cash kept on hand and used for making small payments.
What is petty cash in Quickbooks? ›
Petty cash is a small amount of cash a company keeps on hand to cover small expenses. It is also known as a petty cash fund. This money is used for minor or incidental expenses. Companies sometimes do this to avoid using a credit card or writing a check.
What is the purpose of petty cash quizlet? ›
The petty cash fund is a special fund set up to pay for minor expenses with cash instead of paying by cheque (e.g. tea and coffee, fares, stamps).
Who is petty cash in one sentence? ›
Petty cash is money that is kept in the office of a company, for making small payments in cash when necessary. After having her expense claims overruled, she took the money from petty cash.
