Petty Cash

Cash on hand for small or unexpected expenses

What is Petty Cash?

Petty cash refers to the notion that every business needs cash on a regular basis to pay for such things as office supplies, mail services, or office snacks. Therefore, businesses keep some cash on hand for unexpected expenses. Although there is normally only one cash account in most company’s statement of financial position, petty cash is included in the current asset account under the more general “cash” account.

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. Companies that spend more or less cash than expected may adjust their balances accordingly.

As part of a company’s cash, a petty cash fund is drawn on its checking account, cashing that check and giving the currency and coins to the custodian.  In this transaction, there’s no expense involved.  If money from the fund is used for expenses, the custodian will use petty cash receipts or vouchers to replace that cash.  When the fund is replenished, the expenses will be recorded in the general ledger.

 

Reconciliation Process

Reconciliation of the petty cash fund should be done periodically to ensure that the fund’s balance is correct. In reconciling the balances, the ending balance, or remaining cash on the fund, and all receipt charges should be equal to the original balance, which is usually carried over from the previous reporting period. The fund can be replenished back to the approved amount as required.

 

Internal Controls

No matter how large the balance is, it is important for companies to set up a good internal control system that keeps track of all cash inflows and outflows from the petty cash account. For example, anyone who requires such cash should be required to write their name, date, time and the specific amount and description of the transaction. All these details are usually completed through a petty cash voucher/worksheet. These worksheets come in different forms but generally require similar information. The best way to control the account is to designate one person in the office to manage the amount.

The petty cash voucher may look like this:

 

Petty Cash voucher

 

Related Readings

Thank you for reading CFI’s explanation of petty cash. To learn more about cash flow and accounting, see the following resources:

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