written by | April 25, 2022

Petty Cash: Definition and How Petty Cash Works

Petty cash is the amount of cash used by a company to pay a small amount of money from time to time. Companies prefer to buy small amounts of cash onsite because the cost of creating, signing and processing cheques is time-consuming. Petty cash is a limited amount of money, but every organisation needs to manage it properly. You need to make sure that no one mishandles your money and consider these small costs when the tax time rolls. This article discusses everything related to petty cash and how it works. 

Did you know?

The term "petty" means "minor, small or secondarily important." A petty fund or cash is a small amount of cash set aside for a trivial purchase or petty expenses to avoid the hassle of writing a cheque or monetising.

What Is the Meaning of Petty Cash in Accounting?

Petty cash is the nominal amount held to cover small costs such as repayments and other clerical expenses. Like other funds, petty funds are subject to regular adjustments, and businesses record each transaction in official statements and other records. Almost all departments of large companies store small amounts of cash in drawers, boxes, etc.

Petty cash is helpful for small transactions where cheque or corporate credit card creation is inappropriate. The petty cash that a company considers to be small varies, and many companies hold ₹5,000 to ₹20,000 in small amounts of cash. The following is an example of a transaction for the use of petty cash.

  • Office supplies 
  •  Customer cards  
  •  Flowers 
  •  Catering lunch payments for small employee groups 
  •  Refunds of small work-related expenses to employees

Supervisory obligations generally include enforcement of petty cash rules and regulations, demands for supplies and payment of funds. Custodians are appointed to manage petty funds. They typically have duties that include enforcement of petty cash rules and regulations, demands for supplies and payment of funds.

Also Read: Learn About Bookkeeping: Definition, Types & Importance

What Are Some Typical Petty Cash Expenses?

A petty cash fund is the best option for small purchases and emergencies. No setup is required other than creating an SOP and physically securing cash. If an employee needs to buy but doesn't know the amount in advance, cash is better than a cheque. It is also suitable for when an organisation takes customers to lunch or coffee. In addition, workers often prefer small amounts of cash to spend their money waiting for repayment. Not all retailers accept cheques, and some retailers do not accept credit cards for small purchases. In these cases, cash is the best option.

Why Do I Need a Properly Set Up Petty Cash Fund?

You can use petty cash to circumvent certain internal controls. However, just because petty cash is available does not mean that everyone has access to petty funds for fund purposes. Many companies apply strict internal rules to manage their funds. In many cases, some individuals have the authority to approve withdrawals and can only support costs associated with the legitimate activities or operations of the company.

The petty fund manager can be assigned to fund the cash drawer and write a cheque to create the appropriate accounting entry. Accounting is responsible for distributing cash and collecting receipts for all purchases or funds. If the total amount of petty cash decreases, the revenue will increase and added to the total amount withdrawn. The dual process keeps the funds safe and makes them accessible only to authorised individuals by having a petty cashier.

Reconciling And Recording Petty Cash

If you use petty cash funds, petty cash transactions will continue to be recognised in the financial statements. For petty cash purchases, entries are not created in the accounting journal only if the custodian needs more cash and receives new funds in exchange for a receipt. The journals providing more cash to custodians are debits and credits to cashiers.

The journal line entry is recorded in the excess / deficiency inventory account if there is a shortage or excess. When you run out of petty cash, you get a credit representing your victory. If money is tight, the organisation posts a charge to represent the loss. Businesses use over-accounts or under-accounts to enforce the fund's balance during adjustments.

Organisations adjust the cash register regularly to ensure that the petty cash register balance is correct. When the petty cash balance drops to a preset level, the administrator usually asks the cashier for additional cash. At this point, he calculates the sum of all receipts and will match the amount paid from the petty cash withdrawal. Teller writes a new check to fund the cash drawer and instead receives a receipt from a purchase that runs out of cash when someone needs money. 

Due to the adjustment process, the fund's remaining balance will differ between the original balance minus the charges stated on the receipt and invoice. If the balance is small, it suggests a shortage, and if you have more balance left than you should, you have an excess. There may be slight discrepancies, but if there are imbalances, you need to identify the cause of the discrepancy and correct it. 

Liquid Cash Vs. Petty Cash

Petty cash refers to the money (literally coins or banknotes) that a company keeps at a small cost because it is easier to use cash than a cheque or credit card. 

Liquid cash or cash in hand means available cash or current assets held by the company. It can be real money, such as the amount undeposited in your bank yet, or small banknotes or coins you keep until you change it for your customers. In this sense, the difference between petty cash is where you store your money and how you spend it. Petty cash is often for internal business needs/labour costs, and cash holdings are funds received or refunded to customers. 

However, cash on hand has a broader meaning in accounting. It is known as a company's liquid assets and bank accounts, market debt certificates, money market funds or other cash equivalents in finance. It's not cash, but it's money that's easy and quick to access, and that's why it's at hand. In short, we can say all petty cash is a form of money.

How To Manage Petty Cash?

Without careful use, it is effortless to get out of control of the use of petty cash. Failure to track usage can waste money and have more severe consequences. 

 Fortunately, there are several ways to track your spending. By following these methods, you will be sure to use the cash.

  • Setting Budget

Setting a budget helps you and your employees avoid impulse purchases. Check the cost for the last six months to determine the appropriate amount. Consider how often employees make small purchases and how much they spend. Over hours, you may find that the amount set is too small. In this case, funds replenishment is frequently performed, which is inconvenient. You also need to avoid having too much cash in your fund. The higher the amount, the higher the risk of abuse problems.

  • Record of Receipts

Use a petty cash voucher or slip whenever you operate the fund for a buy. The voucher has to consist of an outline of the price alongside the date and amount. Record the employee's name, the service provider or vendor, and the individual authorised the disbursement. Ensure personnel gets a receipt for every buy, connect it to the voucher and maintain it while reconciling the fund. You can also keep a petty cash format in excel to avoid fraud.

  • Maintaining Reconciliation

Regular reconciling petty funds enables you to avoid unauthorised use and inefficiencies. Monthly reconciliation works nicely for lots of businesses. Tune the quantity you've got last inside the fund to reconcile petty coins. Subtract this quantity from the beginning stability to decide the amount withdrawn. Add up the amount spent primarily based totally on your slips or vouchers. If you haven't executed so already, examine the vouchers to employees` submitted receipts. There must be an identical receipt for every voucher. The withdrawn quantity and the spent quantity must match. If there are ongoing discrepancies, you can need to start reconciling extra often.

Also Read: What Are Debit and Credit? Bookkeeping Basics Explained

Pros And Cons of Petty Cash

The prominent advantages and disadvantages of petty cash are as follows:

Pros of Petty Cash Are

  • Convenient and easy to understand.
  •  Easy to access. No prior approval is required. 
  •  Suitable for emergencies / momentary needs.

Cons of Petty Cash Are

  • Difficult to track and vulnerable to fraud, theft and misuse.
  •  It requires manual monitoring and recording.
  •  Outdated.

Conclusion

A petty fund or cash is a small amount of cash stored on the premises of a store or company that covers a small amount of money or needs. It'sIt's usually under a few thousand rupees. Although easy to understand and use, small cash is easy to misuse, lose sight of and steal. Some people think that petty cash is outdated in today's society. There are many safer and more convenient alternatives for small purchases. This post has all the vital information regarding petty cash

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FAQs

Q: Is petty cash an expense or an asset?

Ans:

A petty cash account is a current asset in financial accounting. Therefore, businesses enter the funds as a normal debit balance.

Q: How to balance petty cash in accounting?

Ans:

An organisation does petty cash accounting when funds need to be replenished. The retail cash manager brings the receipt or receipt to the company's accountant, cashier or accountant. They record receipts for petty cash in the company's general ledger as a credit to the petty cash account and possibly a debit to several expense accounts.

Q: Give an example of petty cash?

Ans:

Organisations usually store petty cash in drawers, lockers or large envelopes. Typical petty cash examples include flowers, birthday cards, small gifts, coffee, sweets or snacks, taxi or car rides, etc.

Q: Why is the term petty cash used?

Ans:

The word "petty" comes from the French petit, "small" or "minor." Therefore, petty cash refers to a small amount of money set aside for a trivial or minor purchase instead of a large amount of cash or an invoice.

Q: What is petty cash used for?

Ans:

Petty cash is the money that a company or company has on hand to make small purchases, payments and refunds. Whether routine or unexpected, these are unrealistic or inconvenient transactions to write a cheque or use a credit card.

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