How Petty Cash Works: From Setup to Reconciliation

Petty cash is a small, readily available fund a business keeps on hand for minor, incidental expenses. It offers a practical solution for outlays impractical to pay through checks, credit cards, or electronic transfers. Petty cash is used for immediate, low-value needs such as postage, minor office supplies, or small employee reimbursements, providing convenience for day-to-day operations.

Setting Up a Petty Cash Fund

Establishing a petty cash fund begins with determining an appropriate initial amount, commonly ranging from $100 to $500, depending on the business’s size and frequency of small expenses. This amount should be sufficient to cover anticipated minor costs for a set period. A trustworthy individual, often an an administrative assistant or office manager, is designated as the petty cash custodian, responsible for safeguarding the fund and managing its disbursements.

The physical setup involves securing the cash in a locked box or drawer, distinct from other company funds, to prevent loss or theft. An initial accounting entry establishes the fund on the company’s books by debiting a “Petty Cash” asset account and crediting the main “Cash” or bank account for the allocated amount.

Handling Petty Cash Payments

Once established, the custodian manages day-to-day payments for approved small expenses. When cash is disbursed, obtain and retain a receipt or a petty cash voucher for every transaction. A petty cash voucher serves as an internal record when an external receipt is unavailable, documenting the details of the expenditure. These vouchers typically include:
The date of the transaction
The amount disbursed
A clear description of the purpose of the expense
The name of the payee
The signature of the person receiving the funds

Each disbursement should be recorded in a petty cash log or ledger. This log provides a running record of all transactions, detailing the date, description, amount spent, and the remaining balance. Maintaining a meticulous log ensures transparency and provides an audit trail. The sum of the cash remaining in the fund and the total value of all vouchers and receipts should always equal the original fund amount, known as the imprest system.

Refilling the Petty Cash Fund

The petty cash fund requires replenishment when the cash balance runs low or at regular intervals, such as weekly or monthly, or at the end of an accounting period. The replenishment process begins with the custodian reconciling the fund. This involves physically counting the remaining cash and summing the total value of all petty cash vouchers and receipts. The combined amount of cash on hand and documented expenses should equal the original imprest fund balance. Any discrepancies, such as shortages or overages, are investigated and noted.

Following reconciliation, the custodian prepares a request for reimbursement. This request summarizes all expenses paid from the fund, with supporting vouchers and receipts attached. This documentation is then submitted to the accounting department for review and approval. Accounting issues a check for the total amount of the disbursed expenses, restoring the cash to its original balance. The accounting entries for replenishment involve debiting the various expense accounts (e.g., Office Supplies Expense, Postage Expense) and crediting the main “Cash” or bank account. The Petty Cash account itself is not affected during replenishment, as its balance remains constant unless the fund’s fixed amount is changed.