What is Petty Cash in Accounting?

Every business, regardless of size, has various expenses that need to be covered daily. These expenses are often small and frequently occur, such as office supplies, refreshments, or minor repairs.

Petty cash is an accounting method used by businesses to manage these small or petty expenses, typically less than $100.

In this blog post, we will explore the concept of petty cash, its features, how it works, and why it is important for businesses.

What is Petty Cash?

Petty cash is a small amount of money a business keeps to cover minor expenses. These unexpected expenses occur daily, such as buying stamps, paying for a taxi ride, or purchasing small office supplies. Petty cash is often managed by an employee or a designated petty cash custodian responsible for the cash and ensuring it is used appropriately.

Petty cash is usually funded by a lump sum of money from the company’s general cash account, and it is used to cover small expenses until the cash runs out. At that point, the petty cash custodian must request more money from the general cash account to replenish the petty cash fund.

Petty cash is recorded in a petty cash book, a ledger that tracks all petty cash transactions. Each time the petty cash fund is used, the expense’s amount, date, and purpose are recorded in the petty cash book. The petty cash custodian is responsible for keeping the book up to date and documenting all expenses properly.

How Does Petty Cash Work?

Petty cash is typically managed by a petty cash custodian, who manages the petty cash fund and keeps track of all expenses. The petty cash custodian is usually an employee who is trusted by the company and has a good track record of managing money.

A lump sum of money is transferred from the company’s general cash account to the petty cash fund to set up a petty cash fund. The amount of money in the petty cash fund will depend on the size of the business and the types of expenses that are likely to occur.

When an employee needs to pay for a small expense, such as buying office supplies, they can request money from the petty cash custodian. The petty cash custodian will provide the employee with the cash, and the employee will need to provide a receipt for the expense.

The petty cash custodian will record the transaction in the petty cash book, noting the date, the amount of money given to the employee, and the purpose of the expense. The employee must also sign the petty cash book to acknowledge that they received the cash.

At the end of each week or month, the petty cash custodian will count the money in the petty cash fund and compare it to the total of all expenses recorded in the petty cash book. If there is a cash shortage, the petty cash custodian will need to request more money from the company’s general cash account to replenish the petty cash fund.

Why is Petty Cash Important?

Petty cash is an important accounting method for businesses because it allows them to manage small expenses efficiently and effectively. By having a petty cash fund, businesses can avoid having employees use their own money for small expenses, which can be inconvenient and time-consuming to reimburse.

Petty cash also allows businesses to keep track of small expenses more easily. By recording all petty cash transactions in the petty cash book, businesses can ensure that all expenses are properly documented and accounted for. This makes it easier to track expenses and prepare accurate financial statements.