The most common method is to use a petty cash tin that has a lock and key. The definition of ‘petty’ is that it is of low importance, and therefore employees will often reflect this in how they treat the fund. Numerous problems can arise when dealing with petty cash if a robust system isn’t in place.
Jane doesn’t have a credit card and has only $25 to last her until she gets paid. If proper controls are not followed, there is the potential for unauthorised expenditures or purchases that are not business related. One of the main disadvantages is the risk of misuse or theft of petty cash. This is especially useful for businesses dealing with numerous small transactions. Petty cash allows for the quick and efficient handling of small, routine expenses without the need for complex approval processes.
Definition and Example of Petty Cash
Petty cash refers to a small amount of hard currency that a businesses will keep on hand to pay for miscellaneous and unexpected items, such as team lunches, birthday cakes, or office snacks. Petty cash is usually a relatively small amount, and is grouped with the general cash account on the balance sheet in current assets. 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. 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 or lockbox that they use to pay for unexpected items. While a petty cash fund may 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.
- These expenditures include items such as postage, delivery expense, and minor office supplies (e.g., coffee).
- The total of the receipts and remaining cash should equal the initial amount of petty cash funding at all times.
- Small payments are often needed for postage, delivery charges, office supplies, or entertainment expenses.
Your postage machine just stopped working, and you need to send one of your employees to the post office fast to get some stamps. However, on corporate financial statements, petty cash is listed in the “Cash and cash equivalents” section of the balance sheet. The reconciliation process ensures that the fund’s remaining balance equals the difference between the original balance minus charges detailed on receipts and invoices.
Increasingly, these slips are electronic ones, entered in a digital spreadsheet or ledger. But it can be helpful to keep paper slips too, along with receipts from the purchases or payments (if possible). If there’s a shortage what is the difference between the current ratio and the quick ratio or overage, a journal line entry is recorded to an over/short account. If the petty cash fund is over, a credit is entered to represent a gain. If the petty cash fund is short, a debit is entered to represent a loss.
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While it would be precise to update these items with an adjusting entry, this step is frequently omitted because of the lack of materiality. The custodian would use the $176 to restore the amount of cash to $200. In most companies, there are many occasions when a small amount of cash must be spent at short notice.
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For example, if there are un-reimbursed expenditures from petty cash at the end of the year, expenses are understated and cash overstated. The job of a custodian is to approve expenditures, maintain records, and request reimbursements for the fund when the remaining cash is low. Finally, surprise petty cash counts should be made to maintain good internal control over the fund. The check is cashed and the money is placed under the control of one designated individual.
What Is Petty Cash? Definition and Guide
When the fund is replenished, the expenses will be recorded in the general ledger. 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.
There are various scenarios where it makes more sense to use petty cash rather than reimbursing an employee through their paycheck. If you have an office manager, they’re the most likely choice to manage the petty cash fund. By following these steps, you can audit your petty cash account and ensure that all of the money is accounted for. By following these steps, you can close your petty cash account and ensure that all of the money is accounted for. – Increased flexibility – Petty cash gives you the flexibility to make spontaneous purchases without having to go through the process of getting approval from your bank or credit card company. Cash on hand is an accounting term, but it can even refer to budgets in reviewing or other bank accounts, cash market funds, short-term debt devices, or other favorably liquid assets.
The petty cash custodian pays out cash as requested in exchange for some form of evidence, such as a receipt or a voucher. The aggregate total of all remaining bills, coins, and evidence of receipt in the petty cash fund should always match the authorized amount of cash for that fund. Once the amount of bills and coins in the fund runs low, the custodian takes the receipts and vouchers to the accounting department and swaps them for a replacement amount of bills and coins.