Petty cash is used in companies for small dollar item purchases that need to be paid in cash. Usually, petty cash is used for purchases such as coffee, water, and donuts for meetings, postage, office supplies, or other miscellaneous expenses.
Most businesses find it helpful to have a petty cash fund because it helps to eliminate multiple records for small dollar amounts. A company must decide how much they want in their petty cash fund. These funds can range from $50 to $1,000 or really any amount that the company decides.
Petty Cash Book
They would also create a separate petty cash book, which is a special internal journal of enterprises and organizations, in which all transactions carried out with the help of cash are recorded. At the same time, as long as the transactions fall within limits set forth by the petty cash fund rules, it does not matter how small or big the amount is, every transaction has to be accounted for and supported by source documents.
When it comes to rules regarding petty cash use, the company should write down specific instructions on who is responsible for this money, how much should be in the fund, and how often it should be replenished. The employees should also be instructed on when it is applicable and allowed to use this cash and when they should use other ways of payment.
How It Works
When a company decides they need a petty cash fund, it must be established with a journal entry. For example, to create a fund for $400, the bookkeeper would debit an account called Petty Cash and record a credit entry under the Cash account.
The bookkeeper will issue a check for the $400 and an individual responsible for keeping track of the petty cash will cash it out. The petty cash is then placed in an easily accessible, yet secure place, for that individual to be able to give the other employees cash when needed.
Then, when other employees make small purchases, they will get the funds from the petty cash custodian. Afterward, they will bring proof of their purchases to the custodian. This employee is responsible for checking that the funds are spent for the reasons approved by the management, as well as keeping a record of how much was spent and when.
About every month, the custodian would reconcile the petty cash fund by pulling the receipts and counting the money left over. If no errors in maintaining the records are made, the total receipts and remaining money should equal the starting point of the fund or $400 in our case.
The next step would be telling the bookkeeper how much of the fund was spent and how much remained. To replenish the fund, the bookkeeper will make an appropriate entry in the accounting books and the cycle starts all over again. For this, a debit is made for each and every expense, and a Cash account is credited. Note the Petty Cash account is not used in this case because the bookkeeper will need to issue a check for the amount needed to bring the fund back to the initial amount.
It should be brought to your attention that there are cases when not all spendings are accounted for in the petty cash book (e.g. employee forgets to return a receipt). If there is a shortage or extra cash, the bookkeeper will account for using a Cash Over and Short debit entry.