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- Here’s all you need to know about petty cash and how to manage it.
- When the petty fund is replenished, usually by drawing on a company-issued check, it’s recorded as a debit to the petty cash account and a credit to the cash account.
- An accountant will typically write a cheque to “Petty cash” to fund the petty cash account and cash this cheque at the company’s bank.
- This makes petty cash susceptible to errors and fraud that could be left undiscovered for months on end.
QuickBooks also provides a wide array of outstanding software that further enhances your business’ financial wellbeing. But if you find that most of your petty cash is not being used, the fund amount might be too large. You should deposit the surplus petty cash into the company bank account. After a designated interval—usually, the same time each month or week—it’s time to reconcile or balance the petty fund account. This sum is the total withdrawn from the account during that time period.
As a practical entrepreneur, you can’t expect everything to go your way. These costs can be urgent, and you may have to handle them immediately. For additional security, you can require the custodian to keep a log of who refunds are given to. You might even enter the names of employees who request funds and why they may need them—it might indicate an expense you weren’t aware of. All these details are usually completed through a petty cash voucher/worksheet.
Advantages and Disadvantages of Petty Cash
The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. The security aspect is often important to small companies, who have long feared that keeping cash around is an invitation to crime.
- Many small businesses will do this monthly, which ensures that the expenses are recognized within the proper accounting period.
- Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s “on hand.”
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- Therefore, during the reconciliation process, the receipts and remaining cash in the box must equal the original petty cash amount.
- The followings are the importance of maintaining a petty cash account in a business.
For instance, if you have $100 in your petty cash account, the receipt of payment should also be equal to it. Companies maintained Petty Cash Book mainly for recording minor cash expenditure, which occurs frequently. The petty cash account is the sub-account of the main cash account. The main idea behind this sub-account is to meet the daily expenses and bypass the lengthy procedure of making cheques. Jane stops to pick up two boxes of donuts, leaving her with $5 in her wallet.
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Therefore, choose a reconciliation system that works for your firm. The petty cash transaction is then recorded on financial statements. The expenditures or purchases made using this cash are not part of the journal entries. Next, the amount is withdrawn from the bank to settle cash expenses. Finally, the amount withdrawn – paper money or coins – is deposited with the custodian.
Because for calculating the ending balance of cash, the petty cash amount should be combined with the cash in hand account. It will be debited with the amount received, and when purchases are made by petty cash, the petty cash account will be credited. If you have an office manager, they’re the most likely choice to manage the petty cash fund. If you only have a few employees, fund management may fall to you. Petty cash is the small amount companies use for minor business needs and expenses. Traditionally in most companies, the petty cash is stored in a cash box or drawer under the custody of the petty cashier.
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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. A petty cash box is designed to hold all the notes and coins separately from the other cash you may have, which removes any confusion around spending.
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When would petty cash be considered a current asset?
Cash that a company keeps for minor expenses is called petty cash. Most firms use the petty cash fund for such expenses since it is an easier option when compared to cheques and cards. It can speed up the reimbursement process, and your employees need not spend money out of their pockets for immediate and petty expenses. It’s important to account for petty cash uses in your general ledger because it is an expense recorded in your financial records, like the balance sheet.
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The bookkeeping entry for this initial fund would be to credit Petty Cash and debit bank account. This cheque would then be cashed to acquire the actual cash needed for payments. Current assets are assets that provide economic benefit within one year. Since petty cash funds can resolve scenarios with readily available cash, this can be considered as providing economic benefits. You must create journal entries that monitor and record all petty cash transactions, just like any other transaction.
For example, the Galaxy’s Best Yogurt maintains a petty cash box with a stated balance of $75 at all times. Upon review of the box, the balance is counted in the following way. To maintain internal controls, managers can use a petty cash receipt (Figure 8.5), which tracks the use of the cash and requires a signature from the manager. Obviously, companies don’t want lots of cash just sitting around in the office. The amounts vary between companies but may be anywhere from $50 to $500.
If the remaining balance is more than what it should be, there is an overage. Although there can be minor variances, when unbalanced, the source of the discrepancy should be identified and corrected. The Internal Revenue Service (IRS) recommends what is business accounting filing out petty cash slips and attaching them to receipts to record and document petty cash expenses. While most businesses usually have a strategy for managing general expenses, petty cash is often too small to be taken seriously.
