What Type of Account Is Petty Cash?

Petty cash represents a small, readily available sum of money kept by businesses to cover minor, day-to-day expenses. These incidental costs are often too small or urgent to warrant the more formal process of writing a check or using a corporate credit card. Think of it as a small reserve for immediate needs, like purchasing office supplies, reimbursing employees for small out-of-pocket expenses, or covering unexpected courier fees. This fund helps maintain operational fluidity by providing a quick and convenient payment method for sundry items.

Understanding Petty Cash

Petty cash is classified as a current asset on a company’s balance sheet. This categorization places it alongside other liquid assets, such as cash in bank accounts and marketable securities, reflecting its ability to be readily converted into other assets or used to settle short-term obligations. It is a specific type of cash account, but unlike general cash, it is earmarked for a distinct purpose: covering small, recurring expenses.

Businesses typically keep petty cash amounts ranging from $50 to $500, which are usually spent over a period of one to two months before replenishment. This structured approach ensures that even minor expenditures are part of the overall financial management system.

Managing a Petty Cash Fund

Establishing a petty cash fund begins with determining an appropriate initial amount, which varies based on business size and typical minor expense volume. This initial sum is typically withdrawn from the company’s main checking account. Once established, the fund is usually placed in a secure location, such as a locked drawer or small safe, to prevent misuse or theft.

A designated employee, known as the petty cash custodian, is responsible for managing the fund. This individual maintains a detailed petty cash log, recording each transaction with information such as the date, amount, purpose of the expense, and the initials of the approver. When payments are made from the fund, a petty cash voucher or receipt should be obtained to document the expenditure. This documentation is crucial for accountability and for later reconciliation.

Periodically, or when the fund runs low, the petty cash fund needs to be reconciled and replenished. Reconciliation involves comparing the remaining cash on hand plus all expense receipts against the original fund amount. If the totals match, the fund is replenished to its initial amount, often through a check drawn from the main bank account.

Accounting for Petty Cash Transactions

The accounting for petty cash transactions primarily occurs when the fund is established and, more frequently, when it is replenished. To establish a petty cash fund, a journal entry is made by debiting the “Petty Cash” asset account and crediting the “Cash” (or “Cash in Bank”) account. For instance, establishing a $200 fund would involve a debit to Petty Cash for $200 and a credit to Cash for $200.

Expenses paid from the petty cash fund are not typically recorded individually at the time each small purchase is made. Instead, these expenses are accumulated and recorded when the fund is replenished. When replenishment occurs, the specific expense accounts (e.g., Office Supplies Expense, Postage Expense, Travel Expense) are debited for the amounts spent, and the “Cash” account is credited for the total amount needed to restore the fund. The “Petty Cash” account itself usually maintains a constant balance under the imprest system, unless management decides to permanently increase or decrease the fund’s size.

If a shortage or overage is discovered during replenishment, a “Cash Over and Short” account is used to reconcile the discrepancy. A shortage, where the cash on hand is less than expected, results in a debit to the “Cash Over and Short” account, which functions as an expense. Conversely, an overage, where there is more cash than expected, results in a credit to the “Cash Over and Short” account, acting similarly to revenue. This account typically appears on the income statement as an “other expense” or “other revenue” due to its usually small and immaterial nature.