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. 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.
Either routine or unexpected, these are transactions for which writing a check or using a credit card is impractical or inconvenient. 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. Petty cash is usually operated on an “imprest” system where an employee is tasked with maintaining and keeping track of petty cash. There are downsides, especially when it comes to knowing how to use petty cash properly. For example, it is easy for employees to abuse, and it can cost your company money.
Petty cash is usually a relatively small amount, and is grouped with the general cash account on the balance sheet in current assets. For example, you don’t want to use petty cash for high priced expenses, so it can help to set a dollar limit, such as $25.00. Anything over that amount would be paid for or reimbursed using other means.
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How to Set Up Petty Cash for Your Business
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. You’ll also want to decide the replenishment point, which is where your expenses are recorded, and a new check is written to bring the petty cash total back to its original amount. For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15.
- There are a number of ways that businesses can benefit (and suffer) from having petty cash at their disposal.
- This acts as a receipt, logging the amount of the withdrawal, the date, the purpose, and other details.
- There are some financial terms in the world of business that might throw managers off a little.
- So ditch the pen and paper, switch to a digital solution, and make petty cash management a walk in the park.
You might use money from the petty cash fund to pay for minor expenses such as postage, Uber fares, or reimburse someone $10 for bringing in a box of donuts. Your available cash should always match the amount recorded in your petty cash log. Once the account is reconciled, you’re ready to record your expenses into your general ledger. 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.
Therefore, it is only appropriate to keep petty cash on hand when a trusted employee can keep an eye on it. 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. how to write invoice emails that get paid fast and 4 templates Companies will need to set money aside in their yearly or quarterly budget to build a petty cash fund. Small purchases can quickly add up over time, so it’s best to overshoot the estimate in the budget. Reconciling petty cash should be simple enough if every petty cash deposit into the business bank account is the same amount every time.
Reconciling Petty Cash
A petty cash fund gives a small business the flexibility of quickly reimbursing or paying small expenditures without having to write a company check or use a company credit card. An employee can run out to the post office, not knowing the exact amount of postage needed on an item for the mail, and take petty cash with them to pay for the expenditure. The biggest downside of petty cash is that it can be easy for employees to abuse or misuse.
This acts as a receipt, logging the amount of the withdrawal, the date, the purpose, and other details. 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). Petty cash is the money that a business or company keeps on hand to make small payments, purchases, and reimbursements.
Determine who will manage petty cash
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. 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. If money from the fund is used for expenses, the custodian will use petty cash receipts or vouchers to replace that cash.
However, on corporate financial statements, petty cash is listed in the “Cash and cash equivalents” section of the balance sheet. On the downside, the convenience of petty cash can also make it a problem, and a risk. Cash is hard to secure and impossible to track; it’s very easy for bills to disappear without a trace—even if you’ve established a careful system of receipts or vouchers. Cash, in many cases, remains the quickest, simplest, easiest way to pay for things. It works well to cover small impromptu expenses—like a tip for the kid delivering pizzas to the lunch meeting, or cab fare home for employees working late.
Internal Controls
The petty cash journal entry is a debit to the petty cash account and a credit to the cash account. 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.
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. Next, total the amount of all the outstanding slips (plus attached receipts). This figure should be the same as the withdrawn sum you calculated from the account starting and ending balances. And the amount of cash you have in your storage box or drawer should be the same as the current balance of the account.
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. The term https://www.bookkeeping-reviews.com/what-is-cost-of-goods-sold-cogs-and-how-to/ “petty cash” refers to the small cash fund a business keeps on hand to cover small emergency and unexpected expenses. The term “cash on hand” refers to all the liquid assets a business has. Cash on hand refers to all the money you have in your safe and in bank accounts, including the actual bills and coins you have in your petty cash fund.
