How To Set Up and Manage a Petty Cash Account

Heather needs a $315 reimbursement to bring the petty cash balance back to $500. After the owner or bookkeeper records all expenses in the books, cash must be taken from the checking account to replenish the petty cash box. Record the transfer of cash by debiting Petty Cash and crediting Checking Account. Every month, or as cash is needed, the custodian should summarize the petty cash log by expense account and record a journal entry debiting each expense and crediting petty cash.

Petty Cash is used to make small miscellaneous purchases that, alone, do not warrant a journal entry. Review petty cash do’s and don’ts to ensure you correctly handle your fund. 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. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

Step 5: Complete the Bottom Portion of the Petty Cash Log

Some businesses put $50 into their petty cash fund while others put $250—the amount of your fund depends on your business needs. Throughout the month, several payments are made from the petty cash account of the Galaxy’s Best Yogurt. For example, for Jane to get reimbursed for the donuts she purchased for the meeting, she needs to provide a receipt.

In the financial world, it also refers to a company’s highly liquid assets—funds in checking or other bank accounts, money market funds, short-term debt instruments, or other cash equivalents. Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s “on hand.” Cash on hand is any accessible cash the business or liquid funds have.

To replenish refers to refilling a depleted cash box in a petty cash system.
Give the receipt to your finance department or the person who handles your small business books.
We can make the petty cash replenishment journal entry by debiting the expenses accounts and crediting the cash account for the petty cash expenses that we have so far.

Petty cash, or petty cash fund, is a small amount of cash your business keeps on hand to pay for smaller business expenses. These small amounts of cash can pay for low-cost expenses, like postage stamps or donuts for a meeting. Petty cash is a convenient alternative to writing checks for smaller transactions. Before establishing a petty cash fund at your small business, be prepared to create a petty cash accounting system.

If the management at a later date decides to decrease the balance in the petty cash account, the previous entry would be reversed, with cash being debited and petty cash being credited. 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. Commercial transactions are increasingly cashless—even at small retailers and restaurants, where purchases traditionally have relied heavily on coins. The reconciliation process ensures that the fund’s remaining balance equals the difference between the original balance minus charges detailed on receipts and invoices. If the remaining balance is less than what it should be, there is a shortage.

The dos and don’ts of petty cash

Notice that the appropriate expense accounts are debited and that cash is credited. There is no need to make an entry to the petty cash account because it still shows a balance of $100. Next, let’s assume that there is only $20.00 in cash remaining and Mary realizes that $20 is not sufficient. She needs to obtain a company check for $80 in order to cash it and return the cash amount to $100 (the amount shown in the Petty Cash account).

Do: require employees to account for expenses

This should be small enough that employees won’t be tempted to steal it but large enough that you don’t have to replenish it too often. Pick a dollar amount you think will cover small office expenses for a month or so. A petty cash fund between $100 and $500 is sufficient for many small businesses. Your petty cash custodian should be the only employee distributing petty cash. Your petty cash custodian determines if the expense is appropriate according to your business’s petty cash policy.Petty cash is considered a highly liquid asset. Consider keeping your petty cash locked in a drawer, safe, or filing cabinet.

If the petty cash account often needs to be replenished before the end of the accounting period, management may decide to increase the cash balance in the account. If you plan to use petty cash for small business purchases like postage and office supplies, it may be handy to use the petty cash log to keep track of your transactions. Keeping careful records of cash expenditures will be a huge help when it comes time to reconcile your petty cash account. However, using accounting software, like QuickBooks Online, can make managing petty cash expenses easier and faster because it simplifies the recording of expenses. Companies replenish the petty cash fund at the end of the accounting period, or sooner if it becomes low.

In accounting, we usually have the cash over and short account to represent both cash overage and cash shortage as their amount is usually small. Hence, we usually net them off against each other by recording the cash over and short on the debit side for the cash shortage. And if it is a cash overage, we will record it on the credit side instead. On the other hand, we may see that there is a cash shortage instead when we make the reconciliation of petty cash funds to the petty cash receipts. It is useful to charge unexplained differences to an expense account set aside for that purpose.

Having a petty cash fund speeds up reimbursements and is an important best practice in cash management. It enables your employees to perform quick errands without using personal money. You have to craft a clear petty cash policy as it sets out the purpose and use of the petty cash fund. The second journal entry is debiting petty cash and credit cash on hand (any cash account). The petty cash is used to pay for the small expenses that suppliers do not allow to purchase on credit. The company will use petty cash and it will keep decreasing to a low level.

This can lead to problems down the road, especially if an audit is conducted. Add up the total expenditure listed on each petty cash voucher in the petty cash fund (the information can also come from the petty cash book). If there is a residual balance, then there is a cash overage in the fund. If there is a negative balance, there is a cash shortage in the fund. This petty cash replenishment journal entry is one of many bookkeeping entries used in accounting, discover another at the links below. Properly tracking petty expenses and ensuring you have a healthy, accurate cash balance isn’t so bad when you follow the tips above.

Whatever steps are deemed necessary (such as surprise counts) should be performed to assure that controls are adequate. Therefore, it is appropriate to keep only enough petty cash available for emergency and convenience needs. Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business.

Making sure that any expense you reimburse has a receipt is also helpful. Your postage machine just stopped working, and you need to send one of your employees to the post office fast to get some stamps. The only problem is she has no cash and her credit card is maxed out. After a wave to zoho books migration guide 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. On the downside, the convenience of petty cash can also make it a problem, and a risk.

The receipt will be used later as back up for recording the petty cash transaction as an expense in your general ledger. If you have an office manager, they’re the most likely choice to manage the petty cash fund. Jane stops to pick up two boxes of donuts, leaving her with $5 in her wallet. Fortunately, her office has a petty cash fund, which her boss immediately reimburses her from, so Jane doesn’t have to submit an expense report and wait for weeks to be reimbursed. The English word “petty” derives from the French petit, which means “small” or “little.” Likewise, “petty” means minor or insignificant.

The petty cash custodian brings all the slips or vouchers to the business’ bookkeeper, cashier, or accountant. The petty cash receipts are logged into the company’s General Ledger as credits to the petty cash account, and probably debits to several different expense accounts. 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. The staff has used petty cash to pay for the taxi $ 100, office supplies $ 200, and other expenses $ 100.