what is a petty cash account

The petty cash journal entry is a debit to the petty cash account and a credit to the cash account. The petty cash custodian then disburses petty cash from the fund in exchange for receipts related to whatever the expenditure may be. There is no journal entry at this point; instead, the cash balance in the petty cash fund continues to decline, while the number of receipts continues to increase. The total of the receipts and remaining cash should equal the initial amount of petty cash funding at all times. However, recordation errors and theft may result in a variance from the initial funding amount. The petty cash fund is reconciled periodically to verify that the balance of the fund is correct.

When the petty cash fund gets too low, you must refill it to its set amount. Then, create another journal entry debiting the Petty Cash account and crediting the Cash account. Before establishing a petty cash fund at your small business, be prepared to create a petty cash accounting system. Put your petty cash policy in writing and offer some examples of appropriate expenses.

Petty Cash Accounting Example

Typically, as the petty cash balance falls to a preset level, the custodian applies for additional cash from the cashier. At this time, the total of all of the receipts is calculated to ensure that it matches the disbursed funds from the petty cash drawer. If new funds are needed, the cashier writes petty cash a new check to fund the petty cash drawer and takes, in exchange, the receipts from the purchases that depleted the cash. To permit these cash disbursements and still maintain adequate control over cash, companies frequently establish a petty cash fund of a round figure such as $100 or $500.

Give out petty cash vouchers or slips whenever employees use petty cash funds. The petty cash voucher must contain the price with the date and amount. Make sure to record the employee’s name, the name of the service provider or vendor, and the name of the person who authorized the cash. The cash must be taken from the checking account to replenish the petty cash box after the bookkeeper records all expenses in the books. The cash transfer must be recorded by debiting petty cash and crediting the checking account.

 Debit Miscellaneous Expense $420; credit Cash $420

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. In this case, an expense is created that creates a cash overage or shortage. However, the petty cash custodian may perform weekly or daily reconciliation to keep track of the fund balance. Using a cash count sheet can be used to document the cash count, but it’s optional. 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.

Hence, the sum of all receipts plus the ending balance should be equal to the petty cash of $500. In the petty cash policy document, we should state that the petty cash fund is $500 with Heather Smith as the custodian. She should also sign the document to transfer https://www.bookstime.com/ the petty cash fund accountability to her. A monitoring and tracking system, with receipts, should be used for the petty cash fund. 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.

Record of receipts

For example, you might send an employee to pick up office supplies, like staples or printer paper. You would use your petty cash fund to reimburse your employee for the purchase of the supplies. Make sure everyone with access to petty cash funds knows what they’re for, and provide some examples of typical petty cash expenses to make sure there’s no confusion. Once you’ve entered your petty cash transactions on the books, your bookkeeping can use them while creating financial statements—so you can accurately factor petty cash into your expenses. Notice how the far right-hand row lists the current balance of the petty cash fund?

Every time a certain amount of petty cash is spent, the fund custodian should save a receipt. On a petty cash slip, the custodian can add the purpose and the date when the cash was spent or any additional information, depending on the company’s policy, and attach it to the receipt. To improve the way you handle petty cash accounting, require a petty cash receipt for each transaction. And, create a petty cash slip indicating the amount, employee’s name, and date when you give employees petty cash. When you or employees pay with petty cash, retain the receipt and attach the petty cash slip to the receipt for your records. Petty cash funds are useful alternatives to writing checks or using your business credit card to cover small expenses.

The English word „petty” derives from the French petit, which means „small” or „little.” Likewise, „petty” means minor or insignificant. So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills. By having a petty cash cashier and a petty cash custodian, the dual-process helps to keep the funds secure and ensure that only those authorized have access to it.

what is a petty cash account

As we mentioned earlier, petty cash is used instead of cash or check to pay for small expenses in a company. Also, it takes a considerable amount of time for the check to be signed and processed. Therefore, companies always resort to cash for payment to avoid all this hassle. After procuring the petty cash, the custodian will store the petty cash in a box and lock it. The petty cash custodian will be the only person who can access the box.

If you’re a small business owner, it’s important to understand how petty cash can be used so you can account for it correctly in your books. Therefore, The bank account that will have the highest effective annual return is For an account that pays 8% nominal interest with daily (365-day) compounding. The bank account that will have the highest effective annual return is For an account that pays 8% nominal interest with daily (365-day) compounding.