Petty cash is a small amount of money, but it adds up quickly as it’s replenished. To track the cash, create a petty cash account in the asset section of your chart of accounts. When you’re ready to replenish the fund, record the expenses in your accounting software based on the petty cash expense log. Then, record the replenishment by debiting the petty cash account and crediting the bank account you used to refill the fund.
- 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.
- Some companies use a voucher system, which essentially works the same way as the log.
- Companies may also allocate petty cash budgets to various departments.
- This may be the result of an employee not getting a receipt or getting back incorrect change from the store where the purchase was made.
- Usually, these are the only items that impact the petty cash account.
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. Your petty cash records might be inaccurate due to employee theft or accounting errors. As your business grows, you may need to re-evaluate the amount you keep in your petty cash fund. Finally, flag petty cash funds for more frequent reconciliations if you detect an ongoing pattern of errors. Increased review frequency can uncover problems before material losses accumulate.
Understanding Petty Cash
The petty cash receipts are logged into the company’s General Ledger as credits to the petty cash account, and probably debits to several different expense accounts. 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. Let’s assume that a company has a petty cash fund of $100 and its general ledger account Petty Cash has a debit balance of $100. Mary is the petty cash custodian who is the only person handling the petty cash transactions. At all times Mary should have some combination of cash and petty cash vouchers (receipts) that are equal to $100.
However, it should be replenished at the end of the accounting period in order to ensure that all expenses are properly recorded. 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. With a petty cash fund in place, you can pay for small expenses like postage stamps, office supplies, office food and drinks, fuel expenses, parking tickets, and other unpredictable expenses.
Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you. Original receipts must be provided by departments when seeking reimbursements for their Petty Cash Fund. A “Replacement Receipt Form” must be completed and signed by both the supervisor and an authorized employee in the case of a missing or lost receipt. If your company is larger, you may need to have more than one fund custodian. No matter what, ensure anyone with that title and responsibility is trustworthy and loyal to the company. Get up and running with free payroll setup, and enjoy free expert support.
Accounting Ratios
Here, the bank account will be the credit side, while the petty cash account is the debit. When accounting for petty cash, companies must record two types of transactions. Usually, these are the only items that impact the petty cash account. On the back of the receipt, write the person’s name and the account from the chart of accounts to which you will charge the purchase. Some companies use a voucher system, which essentially works the same way as the log.
Don’t: leave the cash unsupervised
As the receipts are reviewed, the box must be replenished for what was spent during the month. The journal entry to replenish the petty cash account will be as follows. Utilize forms and vouchers to keep track of your transactions if you intend to use petty cash for small company expenditures like postage and office supplies. When it comes time to balance your petty cash account, keeping meticulous records of cash expenses will come in handy. Company petty cash can be a great boon to businesses, large and small. Petty cash is a designated sum of money that is kept on hand for small, everyday expenses that may come up.
Petty Cash Accounting Example
To maintain operations, it becomes necessary to go to the grocery store across the street and purchase three gallons of milk. A petty cash fund is a type of imprest account, which means that it contains a fixed amount of cash that is replaced as it is spent in order to maintain a set balance. 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.
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. Because a petty cash voucher is made out for all disbursements, the total of the vouchers and the remaining cash should always equal the amount of the fund (in this case, $100). The custodian must create a petty cash voucher for all expenditures.
Before establishing a petty cash fund at your small business, be prepared to create a petty cash accounting system. Add up the total expenditure listed on each petty cash voucher in the petty cash fund (the information can also come from the petty cash book). If there is a residual balance, then there is a cash overage in the fund.
Time Value of Money
On her way to the office, Jane receives a phone call from her boss asking her to stop and pick up some donuts for an unexpected meeting later that morning. Jane doesn’t have a credit card and has only $25 to last her until she gets paid. Therefore, it is appropriate to keep only enough petty cash receipts and bills available for emergency and convenience needs. “Petty cash” and “cash on hand” sound a lot alike, and they do overlap. It should be noted that the debit to the income statement for the expenses, reduces the net income which reduces the retained earnings and therefore the equity in the business.