A small sum of money designated for paying small bills without writing checks is known as petty cash or a petty cash fund. Petty Cash also refers to the current asset account in a company's general ledger, which documents the amount held for small, miscellaneous expenses. Petty cash amounts might range from $30 to $300 and depend on the business.
After each payment made, a petty cash voucher is used to keep track of the petty cash. When the available petty cash is replenished, the costs will be reflected in the company's general ledger expense accounts.
Understanding Petty Cash
When sending a check or using a company credit card is impractical or undesirable, petty cash offers ease. The tiny sum of money that a business considers petty will vary; many businesses maintain a petty cash pool of between $100 and $500. Here are a few examples of transactions typically handled by a petty cash fund:
- Office equipment
- Cards for clients
- Buying a catered meal for several staff members
- Paying an employee back for minor business-related costs
Custodians of petty cash funds are chosen to manage the fund. Enforcing petty cash policies and procedures, obtaining replenishments, and allocating funds are all typically part of the custodial responsibilities.
Recording Petty Cash
Petty cash transactions are still included on financial statements even when a petty cash fund is in use. When petty cash is used to make purchases, no accounting journal entries are made; instead, they are only made when the custodian needs more money and receives fresh money in return for the receipts. Giving the custodian more cash results in a journal entry that debits the petty cash fund and credits cash.
A journal line entry is made to an over/short account whenever there is an underage or overage. The entry of a credit to signify a gain is made if the petty cash fund is over. If there is a deficit in the petty cash fund, a debit is recorded to reflect the loss. Upon reconciliation, the fund is forced to balance due to the over or short account.
Advantages Of Petty Cash
- Cash is still frequently the quickest, simplest, and most straightforward method of payment.
- It works effectively to pay for little unforeseen expenses, such as the tip for the child carrying the pizza to the lunch meeting or the employee's cab ride home after a late shift.
- It avoids the trouble of having to reimburse people or ask them to pay out of pocket for things connected to their jobs.
- Petty cash may also cover regular, essential expenses such as cleaning products, postage stamps, or milk for the workplace fridge.
- Petty cash can be used to make change for clients in a pinch if the till is running low, albeit it shouldn't be done frequently.
Disadvantages Of Petty Cash
- Currency is difficult to track and secure; it is relatively simple for banknotes to vanish without a trace.
- Managing them, keeping track of them, and routinely reconciling them all need additional labor from someone.
- Even at small businesses and restaurants, where purchases traditionally relied significantly on coins, commercial transactions are becoming more and more cashless.
- Some detractors assert that the idea of petty cash has become outdated. There are many options that are easier to use than cash to make purchases, including credit cards, debit cards, electronic wallets, payment systems like Venmo or Paypal, and payment services like these.
- Small businesses frequently place a high priority on security because they have long held the belief that having cash on hand invites crime.
- Petty cash is a little sum of money that is always on hand to cover small expenses that don't warrant writing a check or using a credit card.
- In bigger corporations, individual departments might maintain their own petty cash reserves.
- A petty cash fund can be used to pay for office supplies, greeting cards for clients, flowers, catered lunches for staff members, and employee expense reimbursement.
- The key benefits of using petty cash are its speed, convenience, and simplicity.
- Drawbacks of petty cash funds include vulnerability to theft or misuse, and the need for frequent monitoring and reconciliation.