Throughout the month, several payments are made from the petty cash account of the Galaxy’s Best Yogurt. For example, you don’t want to use petty cash for high priced expenses, so it can help to set a dollar limit, such as $25.00. Anything over that amount would be paid for or reimbursed using other means. Making sure that any expense you reimburse has a receipt is also helpful. Before you start a petty cash fund, you’ll need to decide how much you want the fund to be.

• At the end of the period or year, the petty cash balance will be present on the company’s balance sheet with cash on hand and cash in the bank.
• A petty cash fund gives a small business the flexibility of quickly reimbursing or paying small expenditures without having to write a company check or use a company credit card.
• The security aspect is often important to small companies, who have long feared that keeping cash around is an invitation to crime.
• However, recordation errors and theft may result in a variance from the initial funding amount.
• What’s more, it keeps you from considering anybody in charge of the couple of dollars you have overlooked.

Balancing the petty cash account usually occurs when the fund needs to be replenished. The petty cash custodian brings all the slips or vouchers to the business’ bookkeeper, cashier, or accountant. The petty cash receipts are logged into the company’s General Ledger as credits to the petty cash account, and probably debits to several different expense accounts. When the petty fund is replenished, usually by drawing on a company-issued check, it’s recorded as a debit to the petty cash account and a credit to the cash account.

Reassess the petty cash fund periodically

At the end of July, in the petty cash box there should be a receipt for the postage stamp purchase, a receipt for the milk, a receipt for the window cleaner, and the remaining cash. The employee in charge of the petty cash box should sign each receipt when the purchase is made. The total amount of purchases from the receipts ($45), plus the remaining cash in the box should total $75. As the receipts are reviewed, the box must be replenished for what was spent during the month. The journal entry to replenish the petty cash account will be as follows.

Once the check is cashed, this amount will be added to the petty cash fund to restore the funds to its original level. Petty cash appears within the current assets section of the balance sheet. This is because line items in the balance sheet are sorted in their order of liquidity. Since petty cash is highly liquid, it appears near the top of the balance sheet.

• When your petty cash fund starts to run dry, it’s time to record the expenses and reimburse the fund.
• Which can aid employers in reimbursing employees and clients for small expenses.
• Balancing the petty cash account usually occurs when the fund needs to be replenished.
• For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15.

These transactions should be present on your financial statements and recorded in a manner that oversees the replenishment of your funds. While the actual funding should be recorded, the individual purchases do not need to be officially recorded. 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.

How to Account for Petty Cash

You need to create an expense entry for each receipt that you’re recording from the lockbox. At the time the entry is made, the custodian will receive a $315 check that’s cashed and the money placed in the lockbox. Overall, there’s a total of $500 in the lockbox after replenishment.

Petty Cash Recording Method

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.

If the petty cash fund is short, a debit is entered to represent a loss. The over or short account is used to force-balance the fund upon reconciliation. Current assets are assets that provide economic benefit within one year. Since petty cash funds can resolve scenarios with readily available cash, this can be considered as providing economic benefits. While petty cash funds only take care of small expenses, these funds still need to be managed correctly. Keeping track of these petty cash expenses helps you to capture all your tax-deductible expenses.

Petty Cash vs. Cash on Hand

When a business elects to eliminate its petty cash in favor of other forms of reimbursement, it is no longer listed anywhere on the balance sheet. Next, total the amount of all the outstanding slips (plus attached receipts). This figure should be the same as the withdrawn sum you calculated from the account starting and ending balances. And the amount of cash you have in your storage box or drawer should be the same as the current balance of the account. After a designated interval—usually, the same time each month or week—it’s time to reconcile or balance the petty fund account.

For example, the Galaxy’s Best Yogurt maintains a petty cash box with a stated balance of $75 at all times. Upon review of the box, the balance is counted in the following way. In our example above, we asked for $315 as replenishment because it’s the amount of total receipts. Hence, the sum of all receipts plus the ending balance should be equal to the petty cash of $500. 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.

Even then, a petty cash fund is only appropriate if there is someone to monitor it and track the use of the money. Occasionally, errors may occur that affect the balance of the petty cash account. This may be the result of an employee not getting a receipt or getting back incorrect change from the store where the purchase was made. In this case, an expense is created that creates a cash overage or shortage.

If you’re planning to create a petty cash fund, there are three basic procedures that are essential to follow. These procedures will allow you to keep your funds safe and to keep track of your funds. The fund system of change is often called the fluctuation system or the floating funds. The system requires that the nominal amount is not fixed but as required. For example, the company establishes a nominal amount of USD 500, then due to company financial condition they lower the amount to USD 400 for particular period. Or, they increase it to USD 750 due to incoming project that require bigger amount than current nominal amount can handle.

“Petty cash” and “cash on hand” sound a lot alike, and they do overlap. Therefore, it is appropriate to keep only enough petty cash available for emergency and convenience needs. Strong internal controls should be applied in the company because the availability of cash does what is a 12 month rolling forecast not mean that everyone can approach it and use it for any purpose. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you.