Is Petty Cash Considered an Asset or an Expense?
Demystify petty cash accounting. Understand its dual nature, correctly classifying it as both a balance sheet asset and an income statement expense.
Petty cash is a common feature in many businesses, providing a convenient way to handle minor, day-to-day expenditures. Understanding its accounting treatment, specifically whether it is classified as an asset or an expense, is important for accurate financial record-keeping.
Understanding Petty Cash
Petty cash refers to a small, fixed amount of money a business keeps on hand for minor, incidental expenses. This physical cash is typically stored in a locked box or drawer at the business premises, managed by a designated custodian. The purpose of petty cash is to facilitate quick payments for transactions too small or inconvenient for formal payment systems.
Common uses include purchasing small office supplies, reimbursing employees for minor travel costs, or buying refreshments for meetings. It provides operational efficiency by avoiding the administrative burden associated with formal payment procedures for small outlays. The typical amount held as petty cash often ranges from $100 to $500, depending on the business’s needs.
Initial Petty Cash Fund as an Asset
The initial establishment of a petty cash fund is recorded as an asset, not an expense. Cash is a current asset on a company’s balance sheet, representing a readily available resource for future economic benefit. When a petty cash fund is created, money transfers from one cash account, like a checking account, to the petty cash fund.
This transfer means the company’s total cash amount does not change; it merely changes location and designation. The petty cash fund itself remains a liquid asset, typically classified under “Cash and Cash Equivalents” on the balance sheet. Its value is a debit balance in accounting records, reflecting the company’s control over this resource.
Petty Cash Disbursements as Expenses
While the petty cash fund itself is an asset, using the cash from the fund results in business expenses. When money is taken from the petty cash box for items or services, these individual payments are recorded as specific expenses. For instance, using petty cash to buy postage stamps is categorized as postage expense.
Similarly, reimbursing an employee for a small business meal becomes a meal expense. Each disbursement reflects a cost incurred by the business in its operations. This distinction is important: the fund is the asset, but spending from it creates expenses that impact profitability.
Accounting for Petty Cash
Businesses commonly manage petty cash using the imprest system, which maintains the fund at a fixed amount. When established, a check is written to “Cash,” and the money is placed in the petty cash box, recorded with a debit to Petty Cash and a credit to the main Cash account. As cash is disbursed, a petty cash voucher or receipt is completed for each payment, detailing the amount, purpose, and date.
Expenses are not recorded in the general ledger at the time of each small payment. Instead, journal entries are made when the fund is replenished. The custodian collects all receipts and submits them to accounting, which issues a check to restore the fund to its original balance. At this point, various expense accounts (e.g., Office Supplies Expense) are debited for amounts spent, and the main Cash account is credited for the replenishment. This process ensures the petty cash account maintains a constant balance while expenditures are recognized.