What Is Petty Cash in Accounting & How Is It Managed?

Understanding Petty Cash

Petty cash refers to a small amount of money a business keeps on hand to cover minor, recurring expenses that do not warrant issuing a check or using a credit card. These funds are typically used for incidental costs such as office supplies, postage, refreshments for employees or clients, small transportation fares, or minor repairs. Petty cash is a current asset, meaning it is expected to be used or converted into cash within one year.

Petty cash funds simplify payment for small, immediate needs, offering flexibility for purchases too minor for formal procedures. While amounts vary by business, funds commonly range from $100 to $500.

Establishing a Petty Cash Fund

First, a business determines an appropriate initial amount for the fund, considering its typical small expenditures. This amount should be sufficient to cover expenses for a reasonable period, such as a month, without requiring frequent replenishment.

Next, a specific employee is designated as the petty cash custodian, responsible for managing the fund. To formally establish the fund, an accounting entry is made by debiting the “Petty Cash” account and crediting the main “Cash” account, typically the company’s checking account. This process operates under an imprest system, meaning the fund is established with a fixed amount and is restored to that original balance after expenses are incurred.

Managing and Replenishing a Petty Cash Fund

The ongoing management of a petty cash fund requires careful attention to detail and consistent record-keeping. The designated petty cash custodian holds responsibility for safeguarding the funds, distributing cash for approved expenses, and collecting supporting documentation. For every disbursement, a petty cash voucher or receipt must be completed, detailing the date, amount, purpose of the expenditure, and the recipient.

These vouchers and receipts serve as the primary record of all transactions, providing a clear audit trail. Businesses typically maintain a petty cash log to meticulously record each transaction, including the voucher number, date, expense category, and amount. It is important to note that individual petty cash disbursements are generally not recorded with separate journal entries at the time of payment.

When the cash in the fund runs low, or at the end of an accounting period, the fund needs to be replenished. The custodian summarizes all expenses incurred since the last replenishment, using the collected vouchers and receipts. A request for reimbursement is then prepared and submitted to the accounting department for approval.

Upon approval, a check is issued to the custodian for the exact amount of the expenses, restoring the fund to its original imprest balance. The accounting entry for replenishment involves debiting the specific expense accounts for the amounts spent and crediting the main “Cash” account. The “Petty Cash” account itself is not directly credited during replenishment, as its balance remains fixed unless the overall fund amount is changed. Regular reconciliation is a key control, ensuring that the sum of the remaining cash and the total of all receipts always equals the original fund amount. Any discrepancies discovered during reconciliation are typically recorded in a “Cash Over and Short” account.