Why Petty Cash Is Important to Small Businesses

While petty cash funds only take care of small expenses, these funds still need to be managed correctly. Keeping track of these petty cash expenses helps you to capture all your tax-deductible expenses. Make sure everyone with access to petty cash funds knows what they’re for, and provide some examples of typical petty cash expenses to make sure there’s no confusion. Once you’ve entered your petty cash transactions on the books, your bookkeeping can use them while creating financial statements—so you can accurately factor petty cash into your expenses. Typically, companies keep between $30-$300 in their petty cash funds.

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  1. Since only small purchases are made, there tends to be a huge lack of attention on it.
  2. Cash on hand refers to any accessible funds within the business and has a completely different internal purpose compared to petty cash.
  3. It sure would be nice to have some spare cash around to pay for these small business expenses, wouldn’t it?
  4. The English word “petty” derives from the French petit, which means “small” or “little.” Likewise, “petty” means minor or insignificant.
  5. If new funds are needed, the cashier writes a new check to fund the petty cash drawer and takes, in exchange, the receipts from the purchases that depleted the cash.

In most companies, there are many occasions when a small amount of cash must be spent at short notice. There are pros and cons to just about our current tax v the flat tax v the fair tax everything, including petty cash. We’ve compiled a list of best practices for handling petty cash that are quick and easy to implement.

Keep track of petty cash in a journal entry.

Petty cash is a small amount of cash kept on hand to cover small, and often unexpected, expenses that pop up during a business day. You might use money from the petty cash fund to pay for minor expenses such as postage, Uber fares, or reimburse someone $10 for bringing in a box of donuts. The petty cash custodian is the person accountable for the petty cash fund. They’ll be in charge of handling and disbursing petty cash and ensuring that the petty cash fund is used for its intended purpose. They’re also responsible for the safekeeping of the physical cash and possess the key to the lockbox where the cash and receipts are kept. Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash needs.

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Either routine or unexpected, these are transactions for which writing a check or using a credit card is impractical or inconvenient. If there’s a shortage 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.

Keep track of your petty cash.

Heather needs a $315 reimbursement to bring the petty cash balance back to $500. Then, get the total of the Amount column to determine total petty cash expenses. The ending balance is the difference between the beginning balance and the total petty cash expenses.

Petty cash log

The next step is to write a check to petty cash for $200, cash it, and stow it in your cash register or lockbox. That depends on how many small expenses you make and how often you make them, but most businesses seem fine carrying between $100 and $200 in petty cash. 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. In the upper right portion of the window, click the green New button to create a petty cash account.

Record All Transactions

This creates a $5 shortage that needs to be replaced from the checking account. Utilize forms and vouchers to keep track of your transactions if you intend to use petty cash for small company expenditures like postage and office supplies. When it comes time to balance your petty cash account, keeping meticulous records of cash expenses will come in handy. HighRadius’ automated accounting software offers a comprehensive solution for efficient cash management. The account reconciliation function ensures accurate tracking of petty cash transactions, reconciling invoices, and maintaining a precise balance sheet. Financial close capabilities expedite bookkeeping processes, allowing for faster closure of books.

Making sure that any expense you reimburse has a receipt is also helpful. All these details are usually completed through a petty cash voucher/worksheet. These worksheets come in different forms but generally require similar information.

Your available cash should always match the amount recorded in your petty cash log. Once the account is reconciled, you’re ready to record your expenses into your general ledger. When your petty cash fund starts to run dry, it’s time to record the expenses and reimburse the fund. To reconcile, you’ll need to match your receipts with the amounts recorded on the petty cash form. The petty cash log should include the date, details of the transaction, the cash you put into petty cash, the amount distributed, and a running balance. Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount.

Petty cash accounting, also known as reconciling the ledger, usually happens once a month, although some companies do it weekly. The petty cashier will subtract the remaining amount from the starting amount to determine how much was spent since the last reconciliation of the ledger. 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.

However, the availability of petty cash doesn’t mean that it can be accessed for any purpose by any person. Often, a few individuals are authorized to approve disbursements and can only do so for expenses related to legitimate company activities or operations. There are different ways of tracking transactions in a petty cash book. Some organizations use a separate cash register for the petty cash, and others just track the transactions on ordinary receipts or invoices. How you track your costs does not matter as long as it is consistent.

You would use your petty cash fund to reimburse your employee for the purchase of the supplies. Cash on hand is all the cash that a business has available to spend. Creating, maintaining, and enforcing a robust petty cash management https://www.adprun.net/ system establishes vital internal controls. This ensures accurate recording, reconciliation, and visibility into expenditures. While individual amounts may seem small, cumulatively, they impact financial statements.

And the amount of cash you have in your storage box or drawer should be the same as the current balance of the account. However, on corporate financial statements, petty cash is listed in the “Cash and cash equivalents” section of the balance sheet. Petty cash refers specifically to money—literally, coins and bills—that a company keeps on hand for small outlays, usually because using cash is easier than using a check or credit card. The purpose of this transaction is to refill the petty cash account. The job of a custodian is to approve expenditures, maintain records, and request reimbursements for the fund when the remaining cash is low. Because a petty cash voucher is made out for all disbursements, the total of the vouchers and the remaining cash should always equal the amount of the fund (in this case, $100).

Financial close streamlines the recording of petty cash activities, and anomaly management helps detect discrepancies promptly. These tools bring automation and precision to managing small cash amounts in accountants’ daily routines. To administer the petty cash account effectively, the custodian must maintain a disbursement log.

These costs can be urgent, and you may have to handle them immediately. Making a single person responsible for petty cash cuts down on confusion and minimizes the risk of theft. It might be tempting to wing it for as long as you can, but setting up a proper petty cash system early is crucial.

A debit (increase) to the petty cash fund and a credit (reduction) to the company checking account are the journal entries that must be documented. QuickBooks will record a debit (raise) to the expenditure account you chose in the expense category field and a credit (reduction) to the petty cash account after you save this transaction. On your profit and loss statement, this transaction will raise your expenditures while decreasing your assets on your balance sheet report. To improve the way you handle petty cash accounting, require a petty cash receipt for each transaction. And, create a petty cash slip indicating the amount, employee’s name, and date when you give employees petty cash. When you or employees pay with petty cash, retain the receipt and attach the petty cash slip to the receipt for your records.