How To Do Petty Cash Accounting & Recording in 6 Steps

A small amount of cash, known as petty cash, is set aside for incidental or minor expenses. Generally, these expenses are small, non-recurring, and may be too small to write a check or swipe a credit card. Petty cash is small amounts of cash that branches or departments reserve for incidental or minor expenses. Petty cash or a petty cash management system is based on the imprest system.

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 petty cash system or lockbox that they use to pay for unexpected items. Reconciliation of the petty cash fund should be done periodically to ensure that the fund’s balance is correct.

The Importance of Setting Up Internal Controls to Manage Petty Cash

With the petty cash actively spent, it is natural that the petty cash fund will eventually run dry. Therefore, custodians need to make sure that the funds are sufficiently replenished whenever necessary to support future transactions. In such events, the custodian would usually request an amount of capital from the firm’s bank account to be transferred to the petty cash account. However, all receipts and past expenditures should be correctly reconciled before replenishing the fund. In the meantime, companies ought to develop and implement a set of policies to determine the appropriate scenarios in which petty cash funds will be administered. Essentially, these protocols should define the types of transactions that qualify as petty cash transactions as well as how these expenses will be tracked and reported.

The designated custodian and the business owner, CFO, or controller should be the only ones who have the key. Emma’s 70-person geographically distributed accounting team improved internal controls and streamlined the audit thanks to FloQast. Access more informative articles from the QuickBooks’ Blog that help grow and improve small businesses. QuickBooks also provides a wide array of outstanding software that further enhances your business’ financial wellbeing.

How To Manage Petty Cash

Let us shed light on the subject as we deconstruct the subject for you. The branch of a major electronic store is experiencing another crazy day of business. During this process, it is typical for the company to appoint a different person besides the custodian to perform the monitoring tasks to safeguard the appropriate segmentation of duties. Read how in just a matter of weeks, Qualys leveraged FloQast to standardize the close process and organize controls and documentation for a more simplified SOX compliance.

When there is a shortage of cash, we record the shortage as a “debit” and this has the same effect as an expense. If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are recording revenue. If there were cash overage, the petty cash account would be debited and the cash over and short account would be credited. In this case, the expense balance decreases, and the year-end balance is the net balance from all overages and shortages during the year. Occasionally, errors may occur that affect the balance of the petty cash account. 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.

Definition and Example of Petty Cash

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. While internal audits are standard in all organizations, verification by external auditors will validate your workflows and identify potential problems. For instance, regular reconciliations will help identify and resolve errors or problems if employee reimbursements are immediate.

You must create journal entries that monitor and record all petty cash transactions, just like any other transaction. These transactions should be present on your financial statements and recorded in a manner that oversees the replenishment of your funds. While the actual funding should be recorded, the individual purchases do not need to be officially recorded. The petty cash system has been replaced in many companies by procurement cards, which are credit cards controlled by the business. Procurement cards have the singular advantage of removing readily-accessible cash from the company premises.

Much of this is because cash, in most scenarios, is still the fastest, easiest, and most straightforward way for companies to settle payments. Petty cash works exceptionally well when firms want to settle small impromptu expenses. The more documented petty cash expenses, the more your deductions, and the lower your business tax bill. Keep as much cash as you need in your cash drawer, but not too much, so it isn’t a temptation for employees or robbers. To determine a maximum amount for petty cash, keep records on expenditures over a period of time, using an average amount for each week, for example.

• Petty cash is the sum of cash a company keeps on hand to handle relatively small and non-recurring reimbursements and purchases.
• A petty cash fund allows a small amount of cash to be kept in a convenient place for miscellaneous expenses.
• Petty cash works on the imprest system, in which there is an initial amount of money put into an account, which is drawn upon for a specific purpose (in this case, petty cash).
• Such replenishment may be made through checks issued into the branch’s account or a direct transfer into their account.
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• These receipts should match the replenishment of funds within the recorded periods.