These small amounts of cash can pay for low-cost expenses, like postage stamps or donuts for a meeting. Petty cash is a convenient alternative to writing checks for smaller transactions. If every employee has access to petty cash, bad or nonexistent record keeping usually results. Instead, designate one employee to be responsible for the petty cash fund. Require that employees maintain a running petty cash log for every transaction, including receipts.

A petty cash account provides an easy way for employees to pay for postage, extra supplies an employee might need, or snacks you might buy for a meeting with a client. There are various scenarios where it makes more sense to use petty cash rather than reimbursing an employee through their paycheck. Someone must check the account periodically so the balance doesn’t get too low. When the petty cash drawer gets below a pre-set amount that you determine, add to the drawer by writing a check to “Petty Cash” and cashing that check. Petty cash is the small amount companies use for minor business needs and expenses.

Petty Cash: What It Is, How It’s Used and Accounted For, Examples

Then, place the receipt in the lockbox and record the expense in the petty cash log by entering the date, payee, description, reference number, and amount. Your available cash should always match the amount recorded in your petty cash log. If it doesn’t, you’ll need to account for any cash over and short.

• If there were cash overage, the petty cash account would be debited and the cash over and short account would be credited.
• Finally, the amount withdrawn – paper money or coins – is deposited with the custodian.
• Therefore, it is only appropriate to keep petty cash on hand when a trusted employee can keep an eye on it.
• Check the items for which they are spending, how much, and how often they are spending.
• When your petty cash cashier puts money into the petty cash fund, they must create a journal entry in your books.
• Many small businesses will do this monthly, which ensures that the expenses are recognized within the proper accounting period.

For example, imagine that the Galaxy’s Best Yogurt runs out of milk one evening. It is not possible to operate without milk, and the normal shipment does not come from the supplier for another 48 hours. To maintain operations, it becomes necessary to go to the grocery store across the street and purchase three gallons of milk. A petty cash fund is a type of imprest account, which means that it contains a fixed amount of cash that is replaced as it is spent in order to maintain a set balance. A petty cash fund is a current asset account that should appear on your balance alongside other cash accounts, such as checking and savings accounts.

.  Debit Petty Cash $420; credit Accounts Payable $420.

Based on the information above, fill out the fields to record the expense. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. On her way to the office, Jane receives a phone call from her boss asking her to stop and pick up some donuts for an unexpected meeting later that morning. Jane doesn’t have a credit card and has only $25 to last her until she gets paid. Payroll taxes are the taxes that employers withhold from their employees’ wages and are required to remit to the appropriate government agencies.

As mentioned, petty cash can make things nice and convenient but does carry certain risks. If you follow some best practices, you can reduce the risks that come with petty cash, and protect yourself and your employees. Keeping a small amount of cash in your office or at your store makes it much easier for office managers, bookkeepers, and supervisors to cover occasional small purchases or expenses. The next step is to write a check to petty cash for $200, cash it, and stow it in your cash register or lockbox. All these details are usually completed through a petty cash voucher/worksheet. These worksheets come in different forms but generally require similar information.

How to set up and use petty cash in your business

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat https://www.bookstime.com/ sheets. Therefore, it is appropriate to keep only enough petty cash available for emergency and convenience needs. Note that the account being used to replenish Petty Cash is the main cash account.

• If you follow some best practices, you can reduce the risks that come with petty cash, and protect yourself and your employees.
• The Petty Cash account is only used for setting up the Petty Cash account or increasing/decreasing the amount set aside for Petty Cash.
• Opinions expressed on the pages of this website belong to the author and do not represent the views of companies whose products and services are being reviewed.
• You might even enter the names of employees who request funds and why they may need them—it might indicate an expense you weren’t aware of.
• In this case, an expense is created that creates a cash overage or shortage.
• Before you start using petty cash, add a petty cash policy section to your employee policies and procedures manual.

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. If there’s a shortage or overage, a journal line entry is recorded to an over/short account. If the petty cash fund is over, a credit is entered to represent a gain.

Every purchase using petty cash must be documented in the same way as other business income and expenses. Using a petty cash log or petty cash slips will help capture these expenses so they can be used to offset income for business tax purposes. The petty cash transaction is then recorded petty cash on financial statements. The expenditures or purchases made using this cash are not part of the journal entries. Whenever the cash is replenished, the petty cash custodian must reconcile it. Sometimes, custodians perform a weekly or monthly reconciliation to track the cash balance.

Obviously, companies don’t want lots of cash just sitting around in the office. The amounts vary between companies but may be anywhere from $50 to $500. This amount is usually spent over a period of a month or two, and is replenished when necessary. Since Heather is running out of cash, she may ask for replenishment.

A petty cash fund between $100 and $500 is sufficient for many small businesses. The petty cash is controlled through the use of a petty cash voucher for each payment made. The expenses will be recorded in the company’s general ledger expense accounts when the petty cash on hand is replenished. 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. The journal entry to establish the petty cash fund would be as follows. Every month, or as cash is needed, the custodian should summarize the petty cash log by expense account and record a journal entry debiting each expense and crediting petty cash.