There are various scenarios where it makes more sense to use petty cash rather than reimbursing an employee through their paycheck. 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. For example, anyone who requires such cash should be required to write their name, the date, time, and the specific amount and description of the transaction.

Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s “on hand.” 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.

1. If money from the fund is used for expenses, the custodian will use petty cash receipts or vouchers to replace that cash.
2. Many bookkeepers prefer to combine the second and third journal entries above if the cash is replenished at the same time as expenses are recorded, which is generally the best practice.
3. A lump sum of money is transferred from the company’s general cash account to the petty cash fund to set up a petty cash fund.
4. The amount of the petty cash fund is recorded in a current asset account entitled Petty Cash when the petty cash fund is established.
5. When an employee needs to pay for a small expense, such as buying office supplies, they can request money from the petty cash custodian.

Petty cash is an important accounting method for businesses because it allows them to manage small expenses efficiently and effectively. By having a petty cash fund, businesses can avoid having employees use their own money for small expenses, which can be inconvenient and time-consuming to reimburse. Petty cash is recorded in a petty cash book, a ledger that tracks all petty cash transactions. Each time the petty cash fund is used, the expense’s amount, date, and purpose are recorded in the petty cash book.

What Is Petty Cash?

Once you determine who will handle petty cash, you’re ready to cash a check and deposit the funds into the petty cash lockbox. Petty cash is typically managed by a petty cash custodian, who manages the petty cash fund and keeps track of all expenses. The petty cash custodian is usually an employee who is trusted by the company and has a good track record of managing money. While the company incurs this cost at the double entry accounting defined and explained time of payment, it will be recorded in the general ledger account Postage Expense when the petty cash fund is replenished. 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. However, the petty cash custodian may perform weekly or daily reconciliation to keep track of the fund balance.

“Petty cash” and “cash on hand” sound a lot alike, and they do overlap. After we click the green Save button, the first entry should appear like in the image below. The security aspect is often important to small companies, who have long feared that keeping cash around is an invitation to crime. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Step 4: Reconcile Petty Cash Regularly

In larger corporations, each department might have its own petty cash fund. If you have more than one employee, you could delegate managing the account. The custodian is tasked to overlook and safeguard the account by issuing cash, approving reimbursements, and recording the debits and credits to the account. In the upper right portion of the window, click the green New button to create a petty cash account. At the time the entry is made, the custodian will receive a $315 check that’s cashed and the money placed in the lockbox.

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. Any expense that’s too small to write a check for can be paid with cash from the petty cash fund. Note that it’s a good idea to set a maximum dollar amount for allowable expenses. 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. If there’s a shortage or overage, a journal line entry is recorded to an over/short 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, https://www.quick-bookkeeping.net/reporting-and-analyzing-the-income-statement/ or accountant. 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.

How To Do Petty Cash Accounting Using QuickBooks Online

A petty cash fund is a current asset account that should appear on your balance alongside other cash accounts, such as checking and savings accounts. After recording the journal entry, the custodian should receive $300 cash or check from the owner or cashier. Petty cash is a small amount of money a business keeps to cover minor expenses.

The petty cash custodian is responsible for keeping the book up to date and documenting all expenses properly. 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. 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.

The amount of money in the petty cash fund will depend on the size of the business and the types of expenses that are likely to occur. 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. The petty cash account covers business-related expenses generally categorized as miscellaneous expenses. Business owners usually keep a small amount of cash in a safe or lockbox that they use to pay for unexpected items.

If money from the fund is used for expenses, the custodian will use petty cash receipts or vouchers to replace that cash. When the fund is replenished, the expenses will be recorded in the general ledger. 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. If there is a cash shortage, the petty cash custodian will need to request more money from the company’s general cash account to replenish the petty cash fund.

Click here to read our full review for free and apply in just 2 minutes. Petty cash can also work for frequent but mundane expenses, like milk for the office fridge, stamps, or cleaning supplies. Obviously, companies don’t want lots of cash just sitting around in the office.

For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15. 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. When an employee needs to pay for a small expense, such as buying office supplies, they can request money from the petty cash custodian. The petty cash custodian will provide the employee with the cash, and the employee will need to provide a receipt for the expense. Petty cash is a small amount of currency and coins that a company has available to make very small payments instead of requesting and processing a company check.

Petty cash also allows businesses to keep track of small expenses more easily. By recording all petty cash transactions in the petty cash book, businesses can ensure that all expenses are properly documented and accounted for. This makes it easier to track expenses and prepare accurate financial statements. A lump sum of money is transferred from the company’s general cash account to the petty cash fund to set up a petty cash fund.