Petty Cash Meaning Example Accounting How It Works

Petty Cash Meaning

Petty cash is an integral part of the accounting function in most organizations and is well taken care of by an appointed custodian. A petty amount a company can spend on the daily expenditures varies between $50-$500.

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Key Takeaways

Petty cash is the small amount used to pay for expenses for which issuing a check might not be a sensible option.The time taken to encash a check makes companies prefer paying in cash for small expenses on the spot.There is a Cashier (who prepares), an Authorizer (who approves and authorizes the fund), and a Receiver (who claims) for proper petty fund transaction implementation.When such a petty amount is utilized to settle expenses, it needs to be replenished.

How Petty Cash Works?

Petty cash is the cash amount used to settle small expenditures that companies make from time to time. As the cost of writing, signing, and processing the checks take a lot of time, companies prefer paying in cash on the spot for a smaller amount. In addition, the companies appoint custodians who are responsible and accountable for making sure these cash entries are accurately completed and reconciled at regular intervals.

Companies keep the small amount of cash in the office under the control of a cashier, who keeps a check on each cash transaction for correct entries and appropriate recordkeepingRecordkeepingRecordkeeping is a basic accounting stage that teaches us how to keep track of monetary business transactions with the goal of keeping a permanent record of all transactions, knowing the correct picture of assets-liabilities, profits and losses, etc., keeping control of expenses with the goal of minimizing expenses, and having important information for legal and tax purposes.read more. Expenditures such as day-to-day snacks, tea for employees, employee reimbursementsReimbursementsReimbursement refers to the monetary compensation made by companies, organizations, or governments to employees, customers, taxpayers, or other entities for incurring expenses out of their pocket.read more for occasional traveling, etc., small bank charges, like notary, etc., greetings or sweets to clients or customers on festivals or special occasions – are all paid through a petty fund.

In an organization, there is three personnel to take care of the whole petty money transaction flow:

Cashier – who prepares the petty cash voucher and receiptAuthorizer – approver, who belongs to the higher managementReceiver – the claimant

The frequency at which petty cash is withdrawn differs hugely from organization to organization. For example, a small shopkeeper needs to have more cash readily available than a big organization, mostly settling payments through checks.

Petty Cash Accounting

An organization, as per its estimate, gets approved the cash required for a specific range of time, be it weekly or monthly. Then, the amount is withdrawn from the bank to settle cash expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more based on the approved limit. Finally, the amount withdrawn in the form of paper moneyPaper MoneyPaper money is a country’s currency in banknotes that have a specific value and pay for goods and services. Paper money holds a country’s government backing while the central bank controls the note’s printing and circulation.read more or coins gets deposited with the custodian, who issues receipts and a petty cash voucher for the required cash.

A petty cash transaction is recorded on financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more even when it is already in use. The expenditures or purchases made using these cash amounts are not part of the journal entries. The journal entryJournal EntryA journal entry example would be the country’s purchase of machinery, where the machinery account would be debited and the cash account would be credited.read more, however, is only made when the custodian needs more cash than what has been approved by the company. The journal entries are made when the custodian receives new funds in exchange for the receipts.

When a small amount is utilized to settle expenses, it needs to be replenished. Therefore, the custodian gathers all slips and vouchers issued to different individuals in the organization. The details are recorded in General LedgeGeneral LedgeA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. read morer as credits to the petty cash account, while the same is kept as a debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more detail to multiple other expenseOther ExpenseOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more accounts. As soon as the petty fund is replenished, it is recorded as a debit to the petty cash account and credit to the cash account.

When petty cash fund is replenished by check, it is represented as follows:

Reconciliation

Petty cash reconciliation is required to be done at regular intervals to make sure the fund balance is correct. The custodian has to get the total of all the receipts to make sure that the resulting figure matches the amount taken out from the office drawer. In case a new fund is required, cashiers can write a new check.

If there is a shortage of funds or over the required limit, a journal line entry is recorded into a short/over an account. If the fund is over, it is a credit entry, which indicates gain. On the other hand, it is a debit entry as a loss if the petty cash fund is short. In such a scenario, reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more is observed to balance the funds forcefully.

Example

Let’s take a look at the following petty cash example to understand how it is used in accounting:

Company A has a petty cash fund for which it approved $100. The entry made is as below:

The custodian lets the cash balance decline to $10 before replenishing. Thus, the cashier issues a check worth $90 for replenishment. Accordingly, the entry looks like this:

The expenses as recorded by the cashier along with the amount used for replenishment are entered as:

The petty fund amount, therefore, is now back to the authorized amount worth $100.

Petty Cash Meaning Example Accounting How It Works