What Is Petty Cash?

is petty cash an expense

Before you start a petty cash fund, you’ll need to decide how much you want the fund to be. Between $100 and $200 is fairly common, though you can go lower or higher, depending on your business. However, on corporate financial statements, petty cash is listed in the “Cash and cash equivalents” section of the balance sheet. Petty cash refers specifically to money—literally, coins and bills—that a company keeps on hand for small outlays, usually because using cash is easier than using a check or credit card. “Petty cash” is the term used to refer to the money a business keeps handy for unexpected expenses that occur.

Depending on the types of expenses and your industry, you may also be able to claim itemized deductions for these expenses. 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. After the owner or bookkeeper records all expenses in the books, cash must be taken from the checking account to replenish the petty cash box. Record the transfer of cash by debiting Petty Cash and crediting Checking Account. The petty cash custodian will keep all petty cash items inside a lockbox.

Reassess the petty cash fund periodically

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is petty cash an expense

Most companies maintain a petty cash fund balance of anywhere from $100 to $500, but the amount will depend on your petty cash needs. Our policy states that petty cash reimbursements shouldn’t exceed 10% of the fund balance. However, we can also specify that certain expenses are always chargeable to petty cash, even if they’re above $50. As such, we’ll show you how to do petty cash accounting manually and how QuickBooks Online, our top pick in our best small business accounting software guide, can simplify and speed up petty cash accounting. While a petty cash fund may not be necessary if you work solo, if you have even one employee, it may be worth it to set up a petty cash fund to manage those unexpected expenses properly.

Petty Cash Accounting Example

Jane doesn’t have a credit card and has only $25 to last her until she gets paid. After a designated interval—usually, the same time each month or week—it’s time to reconcile or balance the petty fund account. This sum is the total withdrawn from the account during that time period. Over xerocon 2017 austin texas wrapup 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 sheets. Go back to the Chart of Accounts screen and look for Petty Cash Account.

While it shouldn’t be a habitual practice, petty cash in a pinch can be used to make change for customers, if the till’s running short. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you. Based on the information above, fill out the fields to record the expense. https://www.online-accounting.net/intuit-quickbooks-online-review/ Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

  1. Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount.
  2. It saves the hassle of reimbursing people or expecting them to pay out-of-pocket for work-related items.
  3. 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.
  4. This credit card is not just good – it’s so exceptional that our experts use it personally.

Many bookkeepers prefer to combine the second and third journal entries above if the cash is replenished at the same time as expenses are recorded, which is generally the best practice. By combining the journal entries, Petty Cash isn’t adjusted and the expenses are recorded coming directly from the checking account. The petty cash log is one of the most important components of managing petty cash. Any transactions made into or out of petty cash need to be recorded on the petty cash log. It’s also important that any money disbursed out of the petty cash fund have a receipt. You’ll also want to decide the replenishment point, which is where your expenses are recorded, and a new check is written to bring the petty cash total back to its original amount.

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Using a cash count sheet can be used to document the cash count, but it’s optional. To reimburse expenses, require a receipt from the employee and then provide them with the exact amount of cash and coins from the lockbox. 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. The petty cash custodian is the person accountable for the petty cash fund. They’ll be in charge of handling and disbursing petty cash and ensuring that the petty cash fund is used for its intended purpose. They’re also responsible for the safekeeping of the physical cash and possess the key to the lockbox where the cash and receipts are kept.

Hence, the sum of all receipts plus the ending balance should be equal to the petty cash of $500. 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. The reconciliation is straightforward—every time you take cash out of the box, you replace the cash with a receipt for the same amount.

If you plan to use petty cash for small business purchases like postage and office supplies, it may be handy to use the petty cash log to keep track of your transactions. Keeping careful records of cash expenditures will be a huge help when it comes time to reconcile your petty cash account. However, using accounting software, like QuickBooks Online, can make managing petty cash expenses easier and faster because it simplifies the recording of expenses.

Commercial transactions are increasingly cashless—even at small retailers and restaurants, where purchases traditionally have relied heavily on coins. On the downside, the convenience of petty cash can also make it a problem, and a risk. Cash is hard to secure and impossible to track; it’s very easy for bills to disappear without a trace—even if you’ve established a careful system of receipts or vouchers. Cash, in many cases, remains the quickest, simplest, easiest way to pay for things.

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