What Is a Petty Cash Book and How Does It Work?

A petty cash book serves as an important accounting tool for managing minor, day-to-day expenses. It helps businesses track small disbursements, maintain accurate financial records, and ensure accountability for cash on hand. This system prevents the need for frequent check writing for trivial amounts.

Defining the Petty Cash Book and Its Purpose

Petty cash refers to a small amount of cash kept readily available within a business to cover minor expenses. This cash is typically stored in a secure location, such as a locked box or drawer. The petty cash book is a dedicated ledger where all transactions involving this cash are documented.

The primary purpose of a petty cash system is to offer a convenient method for paying for small expenses without the administrative burden of issuing checks for every minor purchase. It maintains accountability for these funds and simplifies record-keeping for internal oversight and potential audits. Small businesses and individual departments commonly use petty cash for items such as office supplies, postage, minor travel costs, or refreshments. Each disbursement from the petty cash fund requires documentation, often a petty cash voucher or receipt, to ensure transparency and a clear audit trail.

Operating the Petty Cash System

Establishing a petty cash fund begins with determining an appropriate initial amount, which can range from $100 to $500 for many businesses, depending on their typical volume of small expenses. Once the amount is decided, a petty cash custodian is appointed, an individual entrusted with managing the fund. The most common method for managing petty cash is the imprest system, where a fixed amount is initially set aside and restored to that original balance after expenditures.

When a payment needs to be made from the petty cash fund, the custodian disburses the cash and requires a petty cash voucher or receipt. This voucher serves as a record and typically includes the date, amount disbursed, payee, expense description, and authorization signatures. Attaching a receipt to the voucher whenever possible provides additional proof of the expense.

Each payment is immediately recorded in the petty cash book to maintain a record of the fund’s status. The petty cash book usually contains columns for the date, voucher number, transaction description, amount received, amount paid out, and the running balance. It often includes analysis columns to categorize expenses, such as office supplies or postage, which helps in summarizing expenditures for later accounting entries. Maintaining a running balance allows the custodian to know the available cash at any given time.

Replenishment and Reconciliation

Replenishment of the petty cash fund occurs when the cash balance runs low or at predetermined regular intervals, such as weekly or monthly, to restore it to its original imprest amount. To initiate replenishment, the petty cash custodian first counts the remaining cash in the fund. The custodian then totals all petty cash vouchers and receipts for expenses incurred since the last replenishment. The sum of the remaining cash and the total of the vouchers should ideally equal the original imprest amount, confirming that all funds are accounted for.

A request for replenishment is then prepared, often summarizing the expenses by category as recorded in the petty cash book. A check is subsequently issued for the exact amount of the expenses, which replenishes the fund. This process ensures that the general ledger account for petty cash remains at a constant amount, simplifying accounting entries by only recording expenses when the fund is replenished.

Reconciliation is an important step that involves comparing the petty cash book records with the actual cash and supporting vouchers. This process helps verify accuracy, identify any discrepancies, and prevent potential misuse of funds. If a difference exists between the expected balance and the actual cash plus vouchers, it is investigated to determine the cause, which could be a missing receipt, a mathematical error, or an unrecorded transaction. Addressing these discrepancies promptly ensures the integrity of the petty cash system and supports accurate financial reporting.