When that starting amount runs out, you must replenish the fund with additional cash. When accounting for petty cash, companies must record two types of transactions. 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, and other details. Increasingly, these slips are electronic ones, entered in a digital spreadsheet or ledger. But it can be helpful to keep paper slips too, along with receipts from the purchases or payments (if possible).
It can be in the form of actual money, like amounts you haven’t yet deposited in the bank or smaller bills and coins that you keep in the cash register to make change for customers. A petty cashier might be assigned to issue the check to fund the petty cash drawer and make the appropriate accounting entries. The petty cash custodian is charged with distributing the cash and collecting receipts for all purchases or any uses of the funds. As the petty cash total declines, the receipts should increase and add up to the total amount withdrawn. The final step is for the petty cash custodian to periodically replenish the petty cash fund. This is done by charging all receipts in the petty cash box to expense and receiving cash into the fund in the same amount.
Amount: How Much Petty Cash Is Allowed?
In the financial world, it also refers to a company’s highly liquid assets—funds in checking or other bank accounts, money market funds, short-term debt instruments, or other cash equivalents. Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s “on hand.” A petty cash fund is a small amount of company cash, often kept on hand (e.g., in a locked drawer or box), to pay for minor or incidental expenses, such as office supplies or employee reimbursements. The Galaxy’s Best Yogurt establishes a petty cash fund on July 1 by cashing a check for $75 from its checking account and placing cash in the petty cash box. At this point, the petty cash box has $75 to be used for small expenses with the authorization of the responsible manager.
- While all this may sound like too much work to maintain such as small pot of money, the petty cash expenses are typically tax deductible just like any other business expense–and they can add up.
- To begin with, cash-based transactions are relatively complicated, if not impossible, to track.
- However, petty cashiers cannot spend money from the account without receipts.
- The same accounting entry applies when it is finally time to close the petty cash fund.
- For example, you might send an employee to pick up office supplies, like staples or printer paper.
Establishing a dollar amount to meets your business’s petty cash needs is essential. Make sure your employees understand what the petty cash fund can or can’t be used for by creating a petty cash policy. As your business grows, you may need to re-evaluate the amount you keep in your petty cash fund. A monitoring and tracking system, with receipts, should be used for the petty cash fund. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. Before going to the cashier, she should first complete the bottom of the petty cash log.
Ensure That the Funds Are Secured
The first and most critical step in the petty cash management system is to appoint a custodian. This person, in particular, will be the primary employee responsible for overseeing and managing the petty cash management process. Designating such a role would, in turn, help to create accountability and lower the number of potential fraud what is the last in first out lifo method cases due to the reduced number of employees permitted to access the company’s funds. As a result, the petty cash fund size will largely depend on the company and vary by each department (though it would usually be between US$100 and US$500). To fulfill their daily cash needs, small businesses should set up a petty cash system.
Petty Cash
The check is cashed and the proceeds are placed in the petty cash box. At the same time, receipts are removed from the petty cash box and formally recorded as expenses. A petty cash custodian should be designated to safeguard and make payments from this fund. At the time the fund is established, the following journal entry is needed. This journal entry, in essence, subdivides the petty cash portion of available funds into a separate account.
How to record petty cash journal entries?
Between $100 and $200 is fairly common, though you can go lower or higher, depending on your business. Your postage machine just stopped working, and you need to send one of your employees to the post office fast to get some stamps. At a minimum, petty cash is reconciled on a monthly basis as part of the month-end close or more frequently, depending on a company’s transaction volume.
At all times the custodian must have a combination of cash and petty cash vouchers/receipts which add up to $100. The term “petty cash” refers to the small cash fund a business keeps on hand to cover small emergency and unexpected expenses. The term “cash on hand” refers to all the liquid assets a business has.
For control purposes, vouchers are sequentially prenumbered and signed by both the person requesting the cash and the custodian. After the cash is spent, receipts or other relevant documents should be returned to the petty cash custodian, who attaches them to the voucher. All vouchers are kept with the petty cash fund until the fund is replenished, so the total amount of the vouchers and the remaining cash in the fund should always equal the amount assigned to the fund. This person’s name will be listed as the payee on the company’s $100 check and will be accountable for the $100.
Notice that the appropriate expense accounts are debited and that cash is credited. There is no need to make an entry to the petty cash account because it still shows a balance of $100. Occasionally, errors may occur that affect the balance of the petty cash account. This may be the result of an employee not getting a receipt or getting back incorrect change from the store where the purchase was made. In this case, an expense is created that creates a cash overage or shortage. Notice that the petty cash account is debited or credited only when the fund is established or when the size of the fund is increased or decreased, not when the fund is replenished.
4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
The employee in charge of the petty cash box should sign each receipt when the purchase is made. The total amount of purchases from the receipts ($45), plus the remaining cash in the box should total $75. As the receipts are reviewed, the box must be replenished for what was spent during the month.
The remaining $185 on hand is what’s left of the $500 petty cash fund after reimbursements. In the petty cash policy document, we should state that the petty cash fund is $500 with Heather Smith as the custodian. She should also sign the document to transfer the petty cash fund accountability to her.