When establishing the fund, you debit petty cash and credit your cash account. During replenishment, you debit the relevant expense accounts (e.g., https://www.bookstime.com/ office supplies, postage, etc.) and credit petty cash to bring the fund back to its original amount. Each transaction must be documented with petty cash receipts and recorded in a log or accounting software. When the petty cash balance runs low, the receipts are reviewed and more cash is withdrawn from the bank to restore the fund to its original amount. When petty cash is set up, it’s recorded as a debit to the petty cash account and a credit to the bank or cash account. In some cases, using corporate credit cards can be a better alternative to petty cash.
Business plan
Depending on the size and frequency of transactions, this amount is set. Create a list of allowable expenses for which the petty cash fund can be used. For example, small expenses such as postage stamps, office expenses, parking, etc., can be paid using petty cash. On the other hand, in small companies, a single person is usually in charge of petty cash. A petty cash management solution like Happay is an excellent option for businesses with multiple branches and store locations. Steps for reconciling petty cash include counting the remaining QuickBooks cash, reviewing receipts, and ensuring the total matches the original amount allocated.
- While petty cash funds only take care of small expenses, these funds still need to be managed correctly.
- Additionally, for businesses looking to modernize, alternatives like corporate credit cards or digital payment methods offer more control and security.
- This means keeping receipts, recording the amount spent, and noting what the purchase was for.
- The petty cash fund is reconciled periodically to verify that the balance of the fund is correct.
- When a small amount is utilized to settle expenses, it needs to be replenished.
- An organization, as per its estimate, gets approved the cash required for a specific range of time, be it weekly or monthly.
Accounting, Balancing, Journal Entry and Posting
This avoids wasting time or taking extra steps, thus helping ensure that projects stay on track. A petty cash system is a set of policies, procedures, controls, and forms that a company uses to dispense cash for various miscellaneous needs, such as office supplies and services. This system is intended to impose controls over the disbursement of cash, while also setting up a standard process for recording business transactions. While petty cash funds only take care of small expenses, these funds still need to be managed correctly.
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Cash flow management tools, like using accounting software, streamlines the entire process and reduces define petty cash manual effort. Having this policy in writing helps prevent misuse, promotes consistency, and gives employees clear expectations when requesting or spending petty cash. In most organizations, a petty cash fund custodian is formally appointed to oversee the fund.
Regularly auditing the petty cash fund can also help catch any discrepancies early on, ensuring that the money is being handled properly and securely. If there’s more or less cash than expected, it’s important to investigate why. Overages or shortages can happen due to simple mistakes like misplaced receipts, incorrect amounts being handed out, or even theft. Without petty cash, any purchase no matter how small would become a long process. For instance, we need to avoid waiting for the finance department to approve and release the funds for ₹50 for a courier. It is why petty cash makes daily working far easier and less stressful.
- Reconciliation involves verifying that the sum of the remaining cash and recorded expenses matches the original petty cash amount.
- Most companies set their petty cash fund between $50 and $500, depending on how often they make small purchases and what those purchases typically cost.
- Keep the log with the cash box, and require entries before money changes hands.
- That’s exactly the reason why some companies create a petty cash fund.
- It has various columns that categorize expenses under headings such as postage, stationery, travel, etc., giving an analytical view of the spending pattern.
For additional security, you can require the custodian to keep a log of who refunds are given to. 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. If you’re a small business owner, it’s important to understand how petty cash can be used so you can account for it correctly in your books. If a clear record keeping system is not followed, such as unambiguous descriptions of spend and keeping receipts, it can be challenging to trace how funds have been used. If proper controls are not followed, there is the potential for unauthorised expenditures or purchases that are not business related.
Documentation and Record-Keeping
- The main goal of having petty cash is to simplify small, everyday spending.
- It involves counting the remaining cash and comparing it to the total of vouchers issued.
- When a petty expense is recorded on the right-hand side of the book, the same amount is also recorded in the proper expense column.
- Sometimes, the balance in your petty cash fund becomes too low to purchase small expenses.
- This sum is the total withdrawn from the account during that time period.
Proper documentation not only helps with tracking expenses but also makes reconciliation easier, ensuring that everything adds up when it’s time to balance the fund. The fund typically sits in a locked cash box or drawer, managed by one designated employee who tracks every penny that comes and goes. Unlike other business expenses that flow through accounts payable or credit cards, petty cash transactions happen instantly, in cash, without approval delays or processing fees.
b) Appoint a petty cash custodian
Corporate cards can be issued to employees for small purchases, allowing for easy tracking of expenses and eliminating the need for physical cash. Small, everyday business expenses need to be resolved quickly without the intervention of the tedious approval or banking processes, so this is why petty cash is required. It prevents operational delays by enabling instant payments for things such as local travel, office supplies, or minor repairs. Cash in hand is an alternative way to manage frequent low-pass expenses efficiently, saving time and effort.