Somer G. Anderson is CPA, doctor of accounting, và an accounting and finance professor who has been working in the accounting and finance industries for more than đôi mươi years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, và personal finance areas.
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What Is Petty Cash?
A petty cash fund is a small amount of company cash, often kept on hand (e.g., in a locked drawer or box), khổng lồ pay for minor or incidental expenses, such as office supplies or employee reimbursements.
A petty cash fund will undergo periodic reconciliations, with transactions also recorded on the financial statements. In larger corporations, each department might have its own petty cash fund.
Petty cash is a nominal amount of money readily accessible for paying expenses too small to lớn merit writing a check or using a credit card.In larger corporations, each department might have its own petty cash fund.A petty cash fund can be used for office supplies, cards for customers, flowers, paying for a catered lunch for employees, or reimbursing employees for expenses.Petty cash's main advantages are that it's quick, convenient, và easy lớn understand & use.Disadvantages of petty cash funds include their vulnerability to lớn theft & misuse, and the need to lớn monitor & balance them periodically.
Understanding Petty Cash
Petty cash provides convenience for small transactions for which issuing a kiểm tra or a corporate credit thẻ is unreasonable or unacceptable. The small amount of cash that a company considers petty will vary, with many companies keeping between $100 and $500 as a petty cash fund. Examples of transactions that a petty cash fund is used for include:
Office suppliesCards for customersFlowersPaying for a catered lunch for a small group of employeesReimbursing an employee for small work-related expenses
Petty cash fund custodians are appointed lớn oversee the fund. The custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, & dispensing funds.
Requirements for Petty Cash
The use of a petty cash fund can circumvent certain internal controls. However, the availability of petty cash doesn"t mean that it can be accessed for any purpose by any person. Many companies employ strict internal controls to lớn manage the fund. Often, a few individuals are authorized to approve disbursements and can only vày so for expenses related khổng lồ legitimate company activities or operations.
A petty cashier might be assigned lớn issue the check to fund the petty cash drawer & make the appropriate accounting entries. The petty cash custodian is charged with distributing the cash và collecting receipts for all purchases or any uses of the funds. As the petty cash total declines, the receipts should increase and địa chỉ up lớn the total amount withdrawn.
By having a petty cash cashier và a petty cash custodian, the dual-process helps to lớn keep the funds secure & ensure that only those authorized have access lớn it.
Recording Petty Cash
When a petty cash fund is in use, petty cash transactions are still recorded on financial statements. No accounting journal entries are made when purchases are made using petty cash, it’s only when the custodian needs more cash—and in exchange for the receipts, receives new funds—that the journal entries are recorded. The journal entry for giving the custodian more cash is a debit to lớn the petty cash fund & a credit to lớn cash.
If there's a shortage or overage, a journal line entry is recorded to lớn an over/short account. If the petty cash fund is over, a credit is entered khổng lồ represent a gain. If the petty cash fund is short, a debit is entered khổng lồ represent a loss. The over or short account is used lớn force-balance the fund upon reconciliation.
The Internal Revenue Service (IRS) recommends filing out petty cash slips and attaching them to receipts to record và document petty cash expenses.
Reconciling Petty Cash
The petty cash fund is reconciled periodically to verify that the balance of the fund is correct. Typically, as the petty cash balance falls lớn a preset level, the custodian applies for additional cash from the cashier. At this time, the total of all of the receipts is calculated khổng lồ ensure that it matches the disbursed funds from the petty cash drawer. If new funds are needed, the cashier writes a new check to fund the petty cash drawer & takes, in exchange, the receipts from the purchases that depleted the cash.
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. 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 & corrected.
Petty Cash vs. Cash on Hand
"Petty cash" & "cash on hand" sound a lot alike, và they vì chưng overlap. Of the two, "cash on hand" is the more generic term.
Petty cash refers specifically khổng lồ 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.
Cash on hand is any accessible cash the business or liquid funds have. It can be in the form of actual money, like amounts you haven't yet deposited in the bank or smaller bills và coins that you keep in the cash register khổng lồ make change for customers. In this meaning, the difference from petty cash refers to lớn where you're keeping the money, and how you're using it—with petty cash being more for internal business needs/expenses by employees, & cash in hand referring to funds received from or being reimbursed lớn customers.
But cash on hand has a larger meaning, as an accounting term. In the financial world, it also refers to a company's highly liquid assets—funds in checking or other ngân hàng accounts, money market funds, short-term debt instruments, or other cash equivalents. Though not literally cash, it's money that can be easily và quickly accessed, which is why it's "on hand."
Advantages và Disadvantages of Petty Cash
Petty cash has its pluses. Cash, in many cases, remains the quickest, simplest, easiest way to pay for things. It works well to lớn cover small impromptu expenses—like a tip for the kid delivering pizzas to lớn the lunch meeting, or cab fare home for employees working late. It saves the hassle of reimbursing people or expecting them lớn pay out-of-pocket for work-related items.
Petty cash can also work for frequent but mundane expenses, lượt thích milk for the office fridge, stamps, or cleaning supplies.
While it shouldn't be a habitual practice, petty cash in a pinch can be used to lớn make change for customers, if the till's running short.
On the downside, the convenience of petty cash can also make it a problem, & a risk. Cash is hard to lớn secure and impossible lớn track; it's very easy for bills to lớn disappear without a trace—even if you've established a careful system of receipts or vouchers.
This brings us lớn another drawback of petty cash funds: Maintaining them, keeping records, & reconciling them regularly, all involve extra work for someone. This may be a minor nuisance in large firms with an office manager or accounting department; for small businesses, it might create a burden.
Commercial transactions are increasingly cashless—even at small retailers và restaurants, where purchases traditionally have relied heavily on coins. Petty cash has become an outmoded concept, some critics say. In between credit cards, debit cards, payment services lượt thích Venmo or Paypal, electronic wallets, & other contactless ways khổng lồ buy things, plenty of alternatives exist simple as cash—with the added advantages of being traceable, secure, & less subject to lớn theft.
The security aspect is often important lớn small companies, who have long feared that keeping cash around is an invitation to lớn crime.
Convenient, easy khổng lồ understand
Immediately accessible; no advance planning/authorization required
Good for emergencies/impromptu needs
Security risk: Hard to track and subject khổng lồ fraud, theft, misuse
Requires manual monitoring, record-keeping
Petty Cash FAQs
What Is Petty Cash & What Is It Used For?
Petty cash is the money that a business or company keeps on hand to lớn make small payments, purchases, and reimbursements. Either routine or unexpected, these are transactions for which writing a check or using a credit thẻ is impractical or inconvenient.
Why Is It Called Petty Cash?
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 lớn a small sum of money mix aside for trifling or little purchases, as opposed khổng lồ major expenses or bills.
One of the earliest uses of the phrase comes from an educational work on housekeeping by Benjamin Billingsley, Advice to lớn the women & maidens of London, that dates to lớn 1678.
What Is an Example of Petty Cash?
Petty cash is usually kept in a drawer, lockbox, or large envelope. Typical petty cash purchases include:
Coffee, candy, or snacksFlowers, birthday cards, or other small giftsCab fare or car fareSmall office supplies—pens, erasers, staplers, etc.Catered meals
Is Petty Cash a Cash Equivalent?
No. Petty cash is actual cash money: bills & coins. Cash equivalents are highly liquid securities and other assets that can be easily converted into cash: money market funds, commercial paper, or short-term debt, lượt thích Treasury bills.
However, on corporate financial statements, petty cash is listed in the "Cash và cash equivalents" section of the balance sheet. So the two can be lumped together in that sense.
How vì You Balance Petty Cash in Accounting?
Each time you tap into a petty cash fund—that is, take money out—a slip or voucher should be filled out. This acts as a receipt, logging the amount of the withdrawal, the date, the purpose, và other details. Increasingly, these slips are electronic ones, entered in a digital spreadsheet or ledger. But it can be helpful to lớn keep paper slips too, along with receipts from the purchases or payments (if possible).
After a designated interval—usually, the same time each month or week—it's time lớn reconcile or balance the petty fund account. First, cảnh báo the current amount in the fund. Then, subtract this amount from the starting balance. This sum is the total withdrawn from the trương mục during that time period.
Next, total the amount of all the outstanding slips (plus attached receipts). This figure should be the same as the withdrawn sum you calculated from the trương mục starting và ending balances. & the amount of cash you have in your storage box or drawer should be the same as the current balance of the account.
If they don’t match, you’ll have to lớn investigate why: was there a mathematical error? is a receipt missing or incorrect?
Balancing the petty cash account usually occurs when the fund needs to be replenished. The petty cash custodian brings all the slips or vouchers khổng lồ the business' bookkeeper, cashier, or accountant. The petty cash receipts are logged into the company's General Ledger as credits to lớn 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 khổng lồ the cash account.
The Bottom Line
Petty cash is a small amount of cash that is kept on a business or company's premises lớn pay for minor expenses and needs—usually, no more than a few hundred dollars. While it's easy to lớn understand & simple khổng lồ use, petty cash is subject to abuse, easy to lose track of, và vulnerable lớn theft. Some feel that in contemporary society, the petty cash fund is outmoded: plenty of alternatives exist for small purchases that are safer và just as convenient.
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