For bookkeeping purposes, it’s imperative to keep accurate records of every petty cash expenditure in your business.
Any time a petty cash fund is in use, you need to record the transactions on your financial statements. Every single coin counts, and for your business to be successful, you have to do accurate petty cash accounting.
Petty cash is a small amount of cash kept on company premises to pay for minor cash needs. Read on to learn all about how to do petty cash accounting.
How to Do Petty Cash Accounting
There are primarily four steps on how to set up petty cash accounting and recording. These include:
- Establish petty cash policy and procedures.
- Set up a petty cash log.
- Create journal entries to record petty cash.
- Reconcile the petty cash account
1. Establish Petty Cash Policy and Procedures
The first step in doing petty cash accounting involves documenting your petty cash policies and procedures. Subsequently, you should make them known to all your employees. Some of the key details to include in your petty cash policies and procedures are:
- Assign one of your staff the responsibility to oversee petty cash. They should be trustworthy, dealing with petty cash while adhering to all set procedures.
- Determine how much money you need in your petty cash account. If your office is not a big one, a few hundred dollars will do. For larger offices, the amount may be a bit more, maybe up to $500.
- Let your employees know that they’ll need to produce a receipt for any petty cash purchase worth $75 and above.
- Anytime you replenish the petty cash, or at the end of every month (whichever happens first), the petty cash custodian with the cashier must reconcile the account.
- A record of all petty cash purchases done monthly, or more often, on petty cash books.
2. Introduce a Petty Cash Log
A petty cash log is an account detailing every deposit and withdrawal made from your petty cash account. It should include:
- Purchase dates
- A short description of the bought items
- Which account to charge the purchased items
- The receiver of the funds
- The approver of the funds
One log template for each month is sufficient.
3. Create Journal Entries to Record Petty Cash
The minimum requirement is to record all petty cash transactions once every month.
Whether you track your revenue and spend manually or using accounting software, you should make sure petty cash purchases are credit and debit to your petty cash and expense account, respectively.
4. Reconcile the Petty Cash Account
To reconcile your petty cash account, ensure there’s a receipt for all petty cash transactions. In addition, you need to create a journal entry which you’ll record in the books.
For accountability, I am of the firm belief that you should keep receipts for purchases of any amount. However, all the IRS needs is receipts for transactions amounting to $75 and above.
What Is Petty Cash?
Petty cash some money companies keep in a box or drawer in their premises to take care of minor expenses.
Periodically, the petty cash account will undergo reconciliations while at the same time recording its transactions on the financial statements.
If your company is bigger, having a petty cash account for every department is also okay.
Requirements for Petty Cash
Having a petty cash fund is essential in paying for minor internal expenses in your company. However, this doesn’t allow for other use by anyone. That’s where policies and procedures come in.
You need to introduce internal controls for the proper management of petty cash. Allow only a few individuals, trustworthy to you, to approve any disbursements. Find an accountant or a petty cash cashier to help in issuing checks to fund the petty cash account, make the necessary accounting entries, distribute the petty cash, and keep receipts for any petty cash transactions.
With a petty cash custodian and cashier, we can confidently say your funds are secure.
Recording Petty Cash
Petty cash transactions, like any other financial transaction, must be recorded on financial statements. So how do you record petty cash in accounting?
Remember, recording journal entries only happens when the custodian needs cash replenishment. And they must provide the receipts.
For the custodian to have more money, the petty cash account gets debited and the cash account credited in the journal entry. If there are overages or shortages, a journal line entry is recorded to a cash short/over account.
Where the fund is excess, you enter a credit indicating gain. Where it’s short, you record a debit representing a loss. Upon reconciliation, one uses the short/over account to force-balance the fund.
Reconciling Petty Cash
Occasional reconciliation of the petty cash ensures the correctness of the petty cash balance.
Once the amount in the drawer falls below the present amount, the custodian has to request replenishment from the cashier. During this process, comparisons between the dispersed cash from the petty cash box and receipts ensure they balance.
If the custodian needs more cash, the cashier issues a check to add the cash to the petty cash box in exchange for the purchase receipts.
The primary purpose of the reconciliation process is to ensure that what’s in the drawer and what’s in the invoice and receipts equals the original amount. Where it’s more, an overage exists. Similarly, if it’s less, there’s a shortage.
Although it’s common to experience some minor differences, it’s good to identify where the discrepancy is coming from and, if need be, correct it.
Petty Cash Vs. Cash on Hand
Petty cash and cash on hand can be confusing sometimes. However, the two mean different things.
Petty cash is specifically the money (bills and coins) that a company sets aside for minor expenses. The reason for having a petty cash drawer is to make it easier and more convenient to pay for expenses that otherwise look impractical using a credit card or check.
On the other hand, cash on hand refers to any accessible cash that liquid funds or businesses have. It can be real money that you’re yet to deposit into your bank or coins and bills in the cash box that you use to give a change to your customers.
The difference between the two is all about where you keep the cash and how you use it. While petty cash is intended for internal expenses by your employees, cash in hand is received or reimbursed to customers.
Advantages and Disadvantages of Petty Cash
Petty cash has its benefits while, at the same time, disadvantages.
- It’s the most convenient, easiest, and simplest way to pay for minor impromptu expenses.
- It’s highly accessible when direly needed. You need no planning in advance or authorization to get the cash.
- It’s the best source of funds for emergencies.
- It has its security risks. Petty cash is difficult to track, can be stolen or even misused.
- It involves manual record-keeping, which is outdated.
Petty cash is the ideal solution for minor purchases and small expenses in a company. It saves you the hassle of paying for such purchases and expenses from your account and flooding your accountants with receipts.
Mind you, technology is inventing new ways of doing things, and although large companies may see petty cash fund management as a nuisance, it’s essential. Petty cash accounting is vital for every business, and we cannot ignore its benefits to any company, large or small.