Table of Contents
- What Is Petty Cash?
- Key Takeaways on Petty Cash
- How Petty Cash Simplifies Everyday Transactions
- Essential Rules and Controls for Managing Petty Cash
- How to Record Petty Cash Transactions Accurately
- More About Balancing Petty Cash in Accounting
- Comparing Petty Cash and Cash on Hand: What’s the Difference?
- Weighing the Pros and Cons of Using Petty Cash
- What Is Petty Cash and What Is It Used For?
- Why Is It Called Petty Cash?
- What Is an Example of Petty Cash?
- Is Petty Cash a Cash Equivalent?
- The Bottom Line
What Is Petty Cash?
Let me explain what petty cash is: it's a small amount of cash that businesses like yours keep on hand for paying minor expenses, such as office supplies or small reimbursements, where using a check or corporate credit card just doesn't make sense. You typically store it in a secure spot, like a locked box, to handle these incidental costs quickly without messing up your main accounting flow. Businesses reconcile these funds periodically to match transactions with financial statements, ensuring everything stays transparent and accountable. If you understand this process, you can manage those micro-expenses efficiently while keeping internal controls intact.
Key Takeaways on Petty Cash
Petty cash serves as a small reserve of cash you keep on hand for minor expenses, providing convenience for quick, small-scale transactions. You assign a custodian to manage the fund, who handles disbursing the money and keeping accurate records with receipts and regular reconciliations. While it's handy for incidental needs, petty cash brings security risks because physical money is easy to misuse, steal, or lose track of compared to digital payments. Reconciling it means accounting for expenses via receipts and making sure the cash on hand matches the expected balance, with adjustments for any overages or shortages. Even though some view it as outdated with electronic options available, petty cash remains effective for immediate, unplanned small business needs.
How Petty Cash Simplifies Everyday Transactions
Petty cash makes small transactions straightforward when a check or credit card isn't practical. The amount you consider petty varies, but many companies maintain between $100 and $500 in the fund. You might use it for things like office supplies, cards for customers, flowers, paying for a catered lunch for a few employees, or reimbursing staff for minor work-related costs. You appoint custodians to oversee the fund, enforcing rules, requesting replenishments, and dispensing the cash as needed.
Essential Rules and Controls for Managing Petty Cash
Petty cash funds can sometimes skip standard internal controls, but that doesn't mean anyone can access them for any reason. Many companies, including yours potentially, implement strict controls to manage the fund. Typically, only a few authorized people approve disbursements for legitimate business activities. You might have a petty cashier who issues the check to fund the drawer and records the accounting entries. The custodian distributes the cash and collects receipts for every use, with receipts accumulating as the cash decreases. By separating roles between cashier and custodian, you secure the funds and limit access to authorized personnel.
How to Record Petty Cash Transactions Accurately
When using a petty cash fund, you still record transactions on financial statements. Journal entries happen only when the custodian requests more cash, not for each purchase. The entry for replenishing is a debit to the petty cash fund and a credit to cash. If there's a shortage or overage, you record it to an over/short account—a credit for overages to show a gain, or a debit for shortages to represent a loss. This account forces the fund to balance during reconciliation. Remember, the IRS recommends using petty cash slips attached to receipts to document expenses properly.
Step-by-Step Guide to Reconciling Petty Cash Balances
- Determine the current balance of the petty cash fund.
- Subtract the current balance from the original balance to calculate the total amount withdrawn.
- Sum the amounts on all petty cash slips and receipts.
- Compare this total to the calculated withdrawn amount.
- Investigate any discrepancies and correct errors.
- Apply for cash replenishment if needed.
- Record replenishment transactions appropriately in the ledger.
More About Balancing Petty Cash in Accounting
Every time you withdraw from the petty cash fund, fill out a slip or voucher to log the amount, date, purpose, and details—it acts as your receipt. These are often electronic now, in spreadsheets or ledgers, but keeping paper slips with receipts can help. At regular intervals, like weekly or monthly, reconcile the account: note the current amount, subtract it from the starting balance to get the total withdrawn. Then, total the outstanding slips and receipts; this should match the withdrawn sum, and your physical cash should equal the current balance. If not, investigate for errors or missing receipts. Balancing usually happens during replenishment, where the custodian submits slips to the bookkeeper, who logs them as credits to petty cash and debits to expense accounts. Replenishment is debited to petty cash and credited to cash.
Comparing Petty Cash and Cash on Hand: What’s the Difference?
Petty cash and cash on hand overlap but aren't identical; cash on hand is the broader term. Petty cash specifically means physical coins and bills kept for small internal outlays where cash is simpler than checks or cards. Cash on hand includes any accessible cash, like undeposited funds or change in the register for customers—differing from petty cash, which is for employee or business expenses. In accounting, cash on hand also means highly liquid assets like bank accounts or money market funds. Essentially, all petty cash is cash on hand, but not vice versa.
Weighing the Pros and Cons of Using Petty Cash
Petty cash has clear advantages: it's the quickest way to pay for things, ideal for impromptu expenses like tips or cab fares, avoiding reimbursement hassles. It covers routine items like office milk or stamps. In a pinch, it can even make change for customers. But there are downsides—cash is hard to secure and track, making it prone to disappearance without records. Maintaining it requires extra effort for monitoring and reconciliation, which can burden small businesses. With modern options like cards and apps, some see petty cash as outdated, offering less security and traceability.
What Is Petty Cash and What Is It Used For?
Petty cash is money a business keeps on hand for small payments, purchases, or reimbursements—routine or unexpected—where checks or cards are inconvenient.
Why Is It Called Petty Cash?
The term 'petty' comes from French 'petit,' meaning small, so it refers to minor sums for insignificant purchases, not major bills. It dates back to at least 1678 in a housekeeping text.
What Is an Example of Petty Cash?
You keep petty cash in a drawer or lockbox for items like coffee, snacks, flowers, gifts, cab fares, small office supplies, or catered meals.
Is Petty Cash a Cash Equivalent?
No, petty cash is actual bills and coins, while cash equivalents are liquid assets like money market funds. But on balance sheets, petty cash falls under 'Cash and cash equivalents.'
The Bottom Line
Petty cash is a small cash amount kept on premises for minor expenses, typically a few hundred dollars. It's simple but vulnerable to abuse, loss, or theft, and some argue modern alternatives are safer and just as convenient.
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