what is petty cash

Even though the cash economy is getting smaller, there is still often a need to reimburse employees or to quickly pay a delivery driver. A petty cash fund allows a small amount of cash to be kept in a convenient place for miscellaneous expenses. There are downsides, especially when it comes to knowing how to use petty cash properly.

In larger corporations, the manager provides the first level of approval before funds are available. These organisations can also have a restriction on which positions or employees can use this payment option. In smaller companies, where the hierarchy is flatter, such distinctions may be absent. While a petty cash fund may https://turbo-tax.org/law-firm-finances-bookkeeping-accounting-and-kpis/ not be necessary if you work solo, if you have even one employee, it may be worth it to set up a petty cash fund to manage those unexpected expenses properly. Since purchases using the petty cash fund are small, it’s typical to see purchase limits of $50 or less with a total account balance of a few hundred dollars.

Reconcile your petty cash

Instead, designate one employee to be responsible for the petty cash fund. Require that employees maintain a running petty cash log for every transaction, including receipts. Each entry in the petty cash book should include the date, the amount, and what was purchased with the petty cash. Review your petty cash register before you replenish the petty cash fund. The petty cash custodian pays out cash as requested in exchange for some form of evidence, such as a receipt or a voucher.

  • Small payments are often needed for postage, delivery charges, office supplies, or entertainment expenses.
  • The journal entry to fund petty cash would debit the account and credit to cash bank account.
  • The most common way of accounting for petty cash expenditures is to use the imprest system.[2] The initial fund would be created by issuing a cheque for the desired amount.
  • Not only will this help you hold employees accountable, it will also ensure you’re more prepared at tax time.
  • Require that employees maintain a running petty cash log for every transaction, including receipts.

Double-check the maths and the receipts before moving into more suspicious reasons for missing petty cash. Determine the sum of all of the receipts from purchases made in the current accounting period. If not, it looks like you might need to get Accounting for Startups: 7 Bookkeeping Tips for Your Startup the magnifying glass out and do some investigating. First things first, balance the books by counting how much money is left in your petty cash tin. Calculate the withdrawn amount by simply subtracting what’s left from the starting balance.

Petty cash

Postage and packing supplies, birthday cards and cakes, taxi fares and parking meters. These are just a few examples of what can be found on the average petty cash expense list. Even though a petty cash system is (as the name suggests) cash-based, it still requires the full-blown accounting treatment. This means that petty cash undergoes reconciliation periods just like other expenses do.

what is petty cash

To get the fund started, cash a check with an amount that seems appropriate for the size of the company and the volume of anticipated transactions. The amount should be small enough that it’s not terribly tempting for theft, but also big enough that it will be adequate for a month. If your GL doesn’t already have a Petty Cash account on the balance sheet, you’ll need to add one.

Secure the funds

If you’re planning to create a petty cash fund, there are three basic procedures that are essential to follow. These procedures will allow you to keep your funds safe and to keep track of your funds. If everything adds up and you’re simply https://1investing.in/choosing-the-best-accountant-for-your-law-firm/ burning through petty cash regularly, evaluate your spending and look for areas to cut. For example, if you’re buying tons of office supplies week after week, maybe you should look into bulk ordering the supplies to cut down on spending.

what is petty cash

To track the cash, create a petty cash account in the asset section of your chart of accounts. When you’re ready to replenish the fund, record the expenses in your accounting software based on the petty cash expense log. Then, record the replenishment by debiting the petty cash account and crediting the bank account you used to refill the fund. We’re moving towards a cashless society, so keeping cash on hand for small expenses is maybe not as necessary as it used to be. Some small businesses are substituting a prepaid company debit card, which limits spending and can be monitored online. Replenishment can be done with a simple transfer from the company bank account.