It can be in the form of actual money, like amounts you haven’t yet deposited in the bank or smaller bills and coins that you keep in the cash register to make change for customers. A petty cashier might be assigned to issue the check to fund the petty cash drawer and make the appropriate accounting entries. The petty cash custodian is charged with distributing the cash and collecting receipts for all purchases or any uses of the funds. As the petty cash total declines, the receipts should increase and add up to the total amount withdrawn.
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. To begin, have a secure place to store your petty cash funds, such as a lockbox or locked drawer. Most small businesses keep between $100 and $200 in petty cash to pay for these and other unexpected expenses.
The custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, and dispensing funds. Before answering this question, another question emerges what is an asset? An asset is anything that a company owns and will give a benefit after a certain period of time. Let’s discuss some rules that are necessary for maintaining a petty cash account. In a running business, keeping a proper record of all cash inflows and outflows is quite difficult there are too many transactions- small or large.
If there’s a shortage or overage, a journal line entry is recorded to an over/short account. If the petty cash fund is over, a credit is entered to represent a gain. If the petty cash fund is short, a debit is entered to represent a loss.
Step 6: Reload the cash
If you record all these small expenses in the cash book it will make a fuss for the cashier. Therefore, it will become a hard task for the cashier to record and analyze them thoroughly. 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. This is pretty vague, so it’s best to just cover your back and get receipts for everything. The best way to record these expenses is by collecting petty cash receipts.
- Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount.
- 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.
- Although there can be minor variances, when unbalanced, the source of the discrepancy should be identified and corrected.
- Petty cash in itself isn’t an expense, the amount in the petty cash is actually spent on expenses.
- The journal entry for giving the custodian more cash is a debit to the petty cash fund and a credit to cash.
This can be amounts of money that have not been deposited in the bank or small bills and coins. When there is a shortage of cash, we record the shortage as a “debit” and cash book format this has the same effect as an expense. If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are recording revenue.
Is it still worth carrying petty cash?
The petty cash custodian will be the only person who can access the box. Companies must introduce strict internal policies and controls to manage petty cash. In most organizations, a few individuals called petty cashiers are appointed to authorize and approve petty cash disbursements. A petty cash receipt is usually used to fill out the information about each transaction during business operations and maintain internal controls. In large corporations, each department may have its petty cash fund for small expenses to be accounted for all the time. Because petty cash is capable of providing an economic benefit as is, it is always considered a current asset.
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Organization
Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount. The petty cash log is one of the most important components of managing petty cash. Any transactions made into or out of petty cash need to be recorded on the petty cash log. It’s also important that any money disbursed out of the petty cash fund have a receipt. Petty cash is the money a business keeps on hand to pay for miscellaneous purchases. Most purchases made with petty cash are unexpected expenses that can pop up, such as morning coffee for a meeting or dinner for an employee working overtime.
Petty cash is only the physical coins and notes that you have put aside for small expenses. It’s kept differently from cash on hand, as is separated from the rest of the business operations. It’s easy to jump to conclusions, but a discrepancy might simply be down to human error (it happens!).
Step 1: Create petty cash policies and procedures
Entries are needed to (1) establish the fund, (2) increase or decrease the balance of the fund (replenish the fund as cash is used), and (3) adjust for overages and shortages of cash. To maintain internal controls, managers can use a petty cash receipt (Figure 8.5), which tracks the use of the cash and requires a signature from the manager. Petty cash refers specifically to money—literally, coins and bills—that a company keeps on hand for small outlays, usually because using cash is easier than using a check or credit card. The reconciliation process ensures that the fund’s remaining balance equals the difference between the original balance minus charges detailed on receipts and invoices.
If the balance in the petty cash account is supposed to be $75, then the petty cash box should contain $45 in signed receipts and $30 in cash. Assume that when the box is counted, there are $45 in receipts and $25 in cash. In this case, the petty cash balance is $70, when it should be $75.
With cash, it’s easy to feel like you say “abracadabra” and watch it simply disappear. Not to mention how almost impossible it is to then follow the trail. Operational costs like staff salaries, utilities and subscriptions should stick to the general expenses (trust us). Use our product selector to find the best accounting software for you. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. However, it is hard to keep track of large companies’ small outgoing amounts of cash, which may lead to overspending and theft.
What Is Petty Cash and What Is It Used For?
Your available cash should always match the amount recorded in your petty cash log. If it doesn’t, you’ll need to account for any cash over and short. Once the account is reconciled, you’re ready to record your expenses into your general ledger. Whatever you decide, it’s important that only one person have access to the fund at any time, to avoid unaccounted for withdrawals and/or theft. Once you determine who will handle petty cash, you’re ready to cash a check and deposit the funds into the petty cash lockbox.
Upon review of the box, the balance is counted in the following way. If you have more than one employee, you could delegate managing the account. If you do, that employee is called the fund or account custodian. The custodian is tasked to overlook and safeguard the account by issuing cash, approving reimbursements, and recording the debits and credits to the account. If you’re a small business owner, it’s important to understand how petty cash can be used so you can account for it correctly in your books. Next, total the amount of all the outstanding slips (plus attached receipts).
