If the employee needs to spend more than the petty cash request limit, they can use the business credit card. For example, employees cannot use petty cash to buy themselves coffee. An employee using petty cash should provide a receipt for the purchase to the petty cash custodian. Give the receipt to your finance department or the person who handles your small business books. For example, you might send an employee to pick up office supplies, like staples or printer paper.
You need to create an expense entry for each receipt that you’re recording from the lockbox. In our example above, we asked for $315 as replenishment because it’s the amount of total receipts. Hence, the sum of all receipts plus the ending balance should be equal to the petty cash of $500.
Like any other type of transaction, you must record petty cash transactions in your small business accounting books. 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). At the end of the month, assume the $100 petty cash fund has a balance of $6.25 in actual cash (a five-dollar bill, a one-dollar bill, and a quarter).
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. 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.
How to record petty cash in accounting?
The petty cash custodian refills the petty cash drawer or box, which should now contain the original amount of cash that was designated for the fund. The cashier creates a journal entry to record the petty cash receipts. This is a credit to the petty cash account, and probably debits to several different expense accounts, such as the office supplies account (depending upon what was purchased with the cash). The balance in the petty cash account should now be the same as the amount at which it started.
Whatever steps are deemed necessary (such as surprise counts) should be performed to assure that controls are adequate. The check is cashed and the money is placed under the control of one designated individual. This ensures that one individual can be held responsible for all the cash in the fund. Based on the information above, fill out the fields to record the expense. While it shouldn’t be a habitual practice, petty cash in a pinch can be used to make change for customers, if the till’s running short.
The custodian must create a petty cash voucher for all expenditures. This voucher indicates the purpose of the expenditure, the date, and the name of the person receiving the cash. The custodian of the petty cash fund is in charge of approving and making all disbursements from the fund. If you’re familiar with petty cash and need some help understanding how to record the journal entries, here are the most common petty cash journal entries in the bookkeeping process. Next, total the amount of all the outstanding slips (plus attached receipts).
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A petty cash fund is established by transferring a specified amount of cash from the general checking account to a person who is given custodial responsibility for the fund. Most companies maintain a petty cash fund balance of anywhere from $100 to $500, but the amount will depend on your petty cash needs. Our policy states that petty cash reimbursements shouldn’t exceed 10% of the fund balance.
He spends most of his time researching and studying to give the best answer to everyone. Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content. “Petty cash” and “cash on hand” sound a lot alike, and they do overlap. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.
- While it shouldn’t be a habitual practice, petty cash in a pinch can be used to make change for customers, if the till’s running short.
- The custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, and dispensing funds.
- Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash needs.
- You would use your petty cash fund to reimburse your employee for the purchase of the supplies.
Thus, using a petty cash fund avoids the need for making many entries for small amounts. Only when the fund is reimbursed, or when the end of the accounting period arrives, does the firm make an entry in the journal. 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.
Petty cash log
This system simply delays the recording of small expenses until the end of the accounting cycle or the fund is replenished. It’s not really an adjusting journal entry because there is an actual transaction being recorded. Having a petty cash account is just more convenient than going to the accounts payable clerk every time someone needs a stamp or a liter of coffee for a meeting. To permit these cash disbursements and still maintain adequate control over cash, companies frequently establish a petty cash fund of a round figure such as $100 or $500.
- A petty cash fund is a small fund whose purpose is to make small disbursements of cash.
- Finally, surprise petty cash counts should be made to maintain good internal control over the fund.
- If the remaining balance is less than what it should be, there is a shortage.
- In the petty cash policy document, we should state that the petty cash fund is $500 with Heather Smith as the custodian.
This means that expenses above $50 cannot be charged to petty cash. However, we can also specify that certain expenses are always chargeable to petty cash, even if they’re above $50. 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 Internal Revenue Service (IRS) recommends filing out petty cash slips and attaching them to receipts to record and document petty cash expenses.
Petty cash accounting
Alternatively, the cashier could simply count out the cash for the petty cash fund, if there are enough bills and coins on the premises. The initial petty cash journal entry is a debit to the petty cash account and a credit to the cash account. Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash needs. Examples of these payments are office supplies, cards, flowers, and so forth. Petty cash is stored in a petty cash drawer or box near where it is most needed. There may be several petty cash locations in a larger business, probably one per building or even one per department.
When an employee takes money from the petty cash fund, the petty cash custodian must record who took the money, the amount taken, what the money is for, and the date. Before establishing a petty cash fund at your small business, be prepared to create a petty cash accounting system. As a company grows, it may find a need to increase the base size of its petty cash fund. Otherwise, take note that the only entry to the Petty Cash account occurred when the fund was established. For example, a retailer will compare daily cash sales to the actual cash found in the cash register drawers.
Although there can be minor variances, when unbalanced, the source of the discrepancy should be identified and corrected. By having a petty cash cashier and a petty cash custodian, the dual-process helps to keep the funds secure and ensure that only those authorized have access to it. Your petty cash records might be inaccurate due to employee theft or accounting errors. Petty cash funds typically depend on how frequently your business makes small purchases. Finally, surprise petty cash counts should be made to maintain good internal control over the fund.
Since most petty cash purchases are for business expenses, you will likely be able to deduct them from your business’s taxes at year-end. The balance in the petty cash account is now $300, which is where it was originally authorized to be. For example, if there are un-reimbursed expenditures from petty cash at the end of the year, expenses are understated and cash overstated.
The ending balance is the difference between the beginning balance and the total petty cash expenses. The currencies inside the lockbox should be equal to the ending balance. Many bookkeepers prefer to combine the second and third journal entries above if the cash is replenished at the same time as expenses are recorded, which is generally the best practice. By combining the journal entries, Petty Cash isn’t adjusted and the expenses are recorded coming directly from the checking account. Each time you tap into a petty cash fund—that is, take money out—a slip or voucher should be filled out.