What is Petty Cash? Definition, Usage, and Accounting for Petty Cash Accounts

The number of petty cash funds could change depending on the organization’s size. Petty cash is usually funded by a lump sum of money from the company’s general cash account, and it is used to cover small expenses until the cash runs out. At that point, the petty cash custodian must request more money from the general cash account to replenish the petty cash fund.

Moreover, real-time updates mean that you can view your petty cash status at a glance and ensure compliance with internal policies. Not only does this reduce the risk of human error, but it also enables robust reporting for audits and supports the larger, general ledger reconciliation process. In short, accounting software paired with an effective reconciliation system can transform your petty cash system into a model of efficiency and transparency. To ensure your petty cash fund reflects what it should, regular reconciliation is your lifeline.

Maintaining Reconciliation

Businesses regularly replenish petty cash by transferring funds from the main bank account to ensure continuity of operations. By maintaining proper controls and a clear reimbursement process, companies can effectively manage petty cash and integrate it seamlessly into their financial systems. Balancing the petty cash account usually occurs when the fund needs to be replenished. The petty cash custodian brings all the slips or vouchers to the business’ bookkeeper, cashier, or accountant.

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• The definition of ‘petty’ is that it is of low importance, and therefore employees will often reflect this in how they treat the fund.
• After procuring the petty cash, the custodian will store the petty cash in a box and lock it.
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• Depending on your expenses, it could be anywhere between INR 500 to INR 5000.
• The specific time could change from organization to organization, and it could be weekly or monthly.

Increasingly, these slips are electronic ones, entered in a digital spreadsheet or ledger. But it can be helpful to keep paper slips too, along with receipts from the purchases or payments (if possible). 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. By regularly reconciling petty cash funds in your organization, you can avoid inefficiencies and unauthorized use.

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• For offline, petty cash transactions can be recorded using slips, also known as petty cash vouchers, which detail the transaction and help maintain transparency within your company.
• For example, small expenses such as postage stamps, office expenses, parking, etc., can be paid using petty cash.
• Whenever the cash is replenished, the petty cash custodian must reconcile it.
• Petty cash is a small amount of money that is set aside by a company for day-to-day business-related purchases.
• At the end of each week or month, the petty cash custodian will count the money in the petty cash fund and compare it to the total of all expenses recorded in the petty cash book.

Proper accounting for petty cash helps in maintaining financial control and preventing fraud or mismanagement of funds. The English word “petty” derives from the French petit, which means “small” or “little.” Likewise, “petty” means minor or insignificant. So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills. Commercial transactions are increasingly cashless—even at small retailers and restaurants, where purchases traditionally have relied heavily on coins. Use a petty cash voucher or slip whenever you operate the fund for a buy.

Either routine or unexpected, these are transactions for which writing a check or using a credit card is impractical or inconvenient. 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 petty cash definition in accounting entered to represent a gain.

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For example, if you have $75 left in cash and $125 in receipts, that adds up to your original $200. This article covers everything you need to know about setting up and managing a petty cash system that works for your business. Let’s now run through how to account for petty cash using an example from the initial setup of the fund, through to purchasing items using petty cash, and finally replenishing the fund. Naturally, if the business expects to regular make purchases out of petty cash, the initial fund should be larger than if they expect to make fewer purchases.

Without a physical, dedicated place to keep the petty cash, you’ll probably lose track of it, and/or make so many exceptions to when you use the petty cash that it stops being useful. To know more about Happay and how to manage your branch petty cash more efficiently, schedule a demo with us today. That said, you really shouldn’t keep more than you’d spend in a single replenishment period. For instance, if you typically spend about $200 on small expenses every two weeks, there’s no reason to keep $500 in the fund. Petty cash reduces the need for staff to pay for purchases out of pocket, then claim the amount back through company expenses.

The retail cash manager brings the receipt or receipt to the company’s accountant, cashier or accountant. They record receipts for petty cash in the company’s general ledger as a credit to the petty cash account and possibly a debit to several expense accounts. Whenever a small amount is utilized to settle expenses, it must be replenished. The custodian must gather all slips and vouchers issued to different people in the firm.

The next step is to write a check to petty cash for $200, cash it, and stow it in your cash register or lockbox. It sure would be nice to have some spare cash around to pay for these small business expenses, wouldn’t it? Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support. Now the custodian will let the cash balance go till INR 10 before replenishing it. Afterward, the cashier will issue a check worth INR 90 to replenish the fund.

This process not only highlights any discrepancies but also alerts you to when it’s time to top-up the fund, thereby maintaining the integrity of your petty cash system. Additionally, identifying the source of any discrepancy is crucial; a well-thought-out system like BlackLine Account Reconciliations can help streamline this. So, pick a reconciliation schedule that syncs with your business rhythms, and stick to it for accuracy’s sake. Petty cash transactions are typically recorded in the debit column of the petty cash account to reflect cash outflows. The fund is considered a cash equivalent, as it provides immediate liquidity for small, day-to-day expenditures.

This person will be responsible for the overall management of the petty cash fund, which includes making payments and maintaining accurate records of the cash flows in and out of the fund. In accounting, you reconcile petty cash by comparing the fund’s current amount to recorded withdrawals and receipts. Discrepancies must be investigated and resolved to ensure the ledger and cash on hand match. Petty cash is the money that a business or company keeps on hand to make small payments, purchases, and reimbursements.

Depending on the size and frequency of transactions, this amount is set. However, to effectively use your organization’s petty cash fund, you must create a list of petty cash policies and best practices that your employees must follow diligently. All successful companies pay great attention to their expenses and invest hugely in tracking them. Do you have a method to disburse and efficiently track petty cash expenses in your organization? Petty cash is an accounting method used by businesses to manage these small or petty expenses, typically less than $100. Remember, while petty cash might seem like a small detail in your business operations, managing it well is part of building strong financial habits.

All petty cash transactions should come with receipts, which should be stored and reviewed every few months to avoid mistakes or stolen funds. The petty cash fund is reconciled periodically to verify that the balance of the fund is correct. Typically, as the petty cash balance falls to a preset level, the custodian applies for additional cash from the cashier. At this time, the total of all of the receipts is calculated to ensure that it matches the disbursed funds from the petty cash drawer. If new funds are needed, the cashier writes a new check to fund the petty cash drawer and takes, in exchange, the receipts from the purchases that depleted the cash.

Leveraging Technology for Efficient Petty Cash Handling

Keeping a meticulous record of petty cash transactions is non-negotiable. Additionally, for organizations that disburse payments in contexts such as research, maintaining a secure payment log is an important protocol. If payment is made to anonymous research subject(s), the receipt or log must be signed by the Project PI, ensuring accountability. When a petty cash custodian replenishes funds, the accounting journal entries are crucial to capture these financial movements accurately. This log facilitates a transparent view of where the money is going—and how fast it’s being spent. Remember to safeguard all physical receipts or invoices connected to each transaction, as they’re critical during the reconciliation process.

The manager uses $10 to pay for an emergency cleaning service after a spill, and an employee is reimbursed $15 for purchasing additional register tape when the store ran out. Each expense is recorded with a voucher, and when the fund gets down to $20, the manager requests a replenishment of $80, providing the vouchers as proof of the expenses. Petty cash can be used to avoid the considerably more cumbersome check authorization, printing, and signing process.