How To Do Petty Cash Accounting & Recording in 6 Steps

This person should understand the importance of keeping accurate records and demonstrate integrity in handling company resources. It’s best if the custodian is not involved in the accounting or bookkeeping process to ensure a separation of duties, thus mitigating any temptation or opportunity for misappropriation. Petty cash, while seemingly simple, demands meticulous management to ensure financial accuracy and prevent fraud. Every time you make a disbursement or replenish the fund, you’ll need to record the appropriate journal entries. These entries ensure that your financial statements accurately reflect the petty cash balance.

Step 2: Establish the Petty Cash Fund Balance

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Examples of Petty Cash Transactions

By maintaining proper controls and a clear reimbursement process, companies can effectively manage petty cash and integrate it seamlessly into their financial systems. The petty cash fund is reconciled periodically to verify that the balance of the fund is correct. Typically, as the petty cash balance falls to a preset level, the custodian applies for additional cash from the cashier.

• Most companies maintain a petty cash fund balance of anywhere from $100 to $500, but the amount will depend on your petty cash needs.
• You might debit multiple accounts, depending on how often you update your books for petty cash accounting.
• If the remaining balance is more than what it should be, there is an overage.
• The entry must show an increase in your Petty Cash account and a decrease in your Cash account.
• Go back to the Chart of Accounts screen and look for Petty Cash Account.
• The following is an example of a transaction for the use of petty cash.

Employee expense claims

Then, create another journal entry debiting the Petty Cash account and crediting the Cash account. A designated employee, the petty cash custodian, accounts for your business’s use of petty cash. 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.

Differences between management and tax accounting

Creating effective petty cash policies is like drawing a map for a treasure hunt; it guides your employees to use the funds appropriately without getting lost in financial misadventures. You’ll want to outline which expenses are approved for petty cash use and set clear limits on the amount that can be spent per transaction. Detail the process for obtaining cash, including the required documentation such as vouchers or receipts. To avoid any abuse, implement a maximum threshold for cash on hand and specify conditions for replenishment. By communicating these policies clearly to all employees, you establish boundaries that help keep your petty cash system petty cash efficient, transparent, and within control. To improve the way you handle petty cash accounting, require a petty cash receipt for each transaction.

When the time comes to replenish your petty cash, it’s crucial to follow a hitch-free process. First, add up the vouchers to calculate the total expenditures for items like office supplies or postage, ensuring any cash reimbursement is accounted for. This is vital for the accuracy of both your petty cash records and the general ledger. Subtract this amount from the original fund balance to determine how much cash to add. Next, request a new check from your company’s bank account for this amount, and once cashed, reintroduce this back into the fund to bring it up to the original balance. By keeping the reloading process standardized and transparent, you ensure that the petty cash fund is always ready to support those small, necessary expenditures.

History and Evolution of Imprest Funds

Petty cash transactions are typically recorded in the debit column of the petty cash account to reflect cash outflows. The fund is considered a cash equivalent, as it provides immediate liquidity for small, day-to-day expenditures. Businesses regularly replenish petty cash by transferring funds from the main bank account to ensure continuity of operations.

• The use of a petty cash fund can circumvent certain internal controls.
• This means that expenses above $50 cannot be charged to petty cash.
• Every business, regardless of size, has various expenses that need to be covered daily.
• When you put money into the fund, you must create a journal entry debiting your Petty Cash account and crediting your Cash account.
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Oh, also, you need to buy your team some food for a late afternoon sprint, and the office printer is out of ink. Your company isn’t big enough to have company credit cards yet, and you’re big on keeping personal and business expenses separate. Petty Cash is a small amount of funds set aside to cover incidental expenses such as postage, office supplies, or employee reimbursements.

• Petty cash shines brightest when used for small, unforeseen expenses that keep the workplace humming along.
• Some businesses put $50 into their petty cash fund while others put $250—the amount of your fund depends on your business needs.
• 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.
• Petty cash, as the name suggests, is a small amount stored in office boxes or drawers to be used to pay for small expenses, including employee meals and snacks.

Setting Up Your Petty Cash System

The journal line entry is recorded in the excess / deficiency inventory account if there is a shortage or excess. When you run out of petty cash, you get a credit representing your victory. If money is tight, the organisation posts a charge to represent the loss. Businesses use over-accounts or under-accounts to enforce the fund’s balance during adjustments.