Petty cash Definition & Meaning

Steps to minimize abuse include limiting the amount that can be disbursed through petty cash, requiring receipts, and monthly audits by a responsible person other than the custodian. Record the following transactions in a simple petty cash book for the month of January 2019. A petty cash book is maintained to record small expenses such as postage, stationery, and telegrams. It’s important to account for petty Petty Cash Definition cash uses in your general ledger because it is an expense recorded in your financial records, like the balance sheet. Depending on the types of expenses and your industry, you may also be able to claim itemized deductions for these expenses. A petty cash account provides an easy way for employees to pay for postage, extra supplies an employee might need, or snacks you might buy for a meeting with a client.

• Often, a few individuals are authorized to approve disbursements and can only do so for expenses related to legitimate company activities or operations.
• Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.
• If the remaining balance is less than what it should be, there is a shortage.
• Petty cash is a small amount of actual cash that a company has on hand to purchase items that cost so little that cutting a check doesn’t make sense or isn’t realistic.
• The petty cash is controlled through the use of a petty cash voucher for each payment made.
• At the end of fixed period, the petty cashier submits the details of petty expenses, and the chief cashier again advances a fixed amount for the next fixed period.

Petty Cash is also the title of the general ledger current asset account that reports the amount of the company’s petty cash. The amount of petty cash will vary by company and may be in the range of $30 to $300. In the financial world, it also refers to a company’s highly liquid assets—funds in checking or other bank accounts, money market funds, short-term debt instruments, or other cash equivalents. Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s “on hand.” If there’s a shortage or overage, a journal line entry is recorded to an over/short account. The over or short account is used to force-balance the fund upon reconciliation.

Posting Petty Cash Book to Ledger

This figure should be the same as the withdrawn sum you calculated from the account starting and ending balances.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. After a designated interval—usually, the same time each month or week—it’s time to reconcile or balance the petty fund account. This sum is the total withdrawn from the account during that time period.

• Once the amount of bills and coins in the fund runs low, the custodian takes the receipts and vouchers to the accounting department and swaps them for a replacement amount of bills and coins.
• Balancing the petty cash account usually occurs when the fund needs to be replenished.
• You should periodically review the control problems that have arisen, to see if the system of controls should be adjusted to reduce the risk of loss.
• Petty cash or a petty cash fund is a small amount of money available for paying small expenses without writing a check.
• In larger corporations, each department might have its own petty cash fund.

The amount of petty cash a company has on hand depends on the size and nature of the business. While a small business might need just $50, a large company department might start with $150. In all businesses, some payments are made by check for better control over cash. However, for the payment of small expenditures (e.g., stationery, travel, postage, and newspapers), paying by check is unreasonable. For additional security, you can require the custodian to keep a log of who refunds are given to.

What is Petty Cash?

Under the fixed system of petty cash, a fixed amount is given to the petty cashier for a fixed period of time. The difference between the sum of the debit items and the sum of the credit items represents the balance of the petty cash in hand. Petty cash shouldn’t be used to help cover operating costs such as bulk office supplies, office-equipment maintenance, or any larger purchases where using a credit card, line of credit, or check is more practical. You should periodically review https://kelleysbookkeeping.com/variable-overhead-definition/ the control problems that have arisen, to see if the system of controls should be adjusted to reduce the risk of loss. 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.

Therefore, the total debits in the ledger agree with the credit in the main cash book. In other words, the petty cash book does not form a part of double-entry bookkeeping. Each time you tap into a petty cash fund—that is, take money out—a slip or voucher should be filled out. 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.

Petty Cash: What It Is, How It’s Used and Accounted For, Examples

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. It saves the hassle of reimbursing people or expecting them to pay out-of-pocket for work-related items.

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. The petty cashier is always assumed to hold cash equal to the imprest account in the form of actual cash or paid-up PCVs. Under this system, the petty cashier is given a lump sum to meet petty expenses.