Why Petty Cash Is an Asset and How to Account for It
Streamline your business's small cash management. Discover best practices for handling, recording, and controlling minor expenses.
Petty cash serves as a convenient tool for businesses to handle minor, immediate expenses that do not warrant checks or electronic transfers. Organizations use these funds for small purchases, such as office supplies, postage, or local transportation costs. Understanding how petty cash is classified and managed within a company’s financial records is important for accurate accounting.
What is Petty Cash and Why is it an Asset?
Petty cash refers to a small amount of cash kept on hand by a business for incidental expenditures too small to be paid by check or electronic means. It provides immediate liquidity for day-to-day operational needs, such as reimbursing employees for small purchases or covering minor supplies. This fund allows for efficiency in managing routine, low-value transactions.
Petty cash is classified as a current asset on a company’s balance sheet. It meets the definition of an asset as it represents a resource controlled by the entity from which future economic benefits are expected. The cash is physically controlled by the business, and its use facilitates ongoing operations, providing a direct benefit. The fund results from a past transaction, typically a withdrawal from a bank account.
Accounting for Petty Cash Transactions
The imprest system is the standard method for accounting for petty cash, ensuring a fixed amount is always available. When the fund is established, the accounting entry involves debiting the Petty Cash account and crediting the Cash (bank) account for the set amount.
Individual expenses paid from the petty cash fund are not recorded as journal entries at the time of disbursement. Instead, a petty cash voucher or receipt is collected for each expenditure, detailing the amount, purpose, and date. These vouchers provide a record of how the cash was spent.
The fund is replenished periodically, or when the cash runs low, to restore it to its original imprest amount. At replenishment, the total of all expense vouchers is calculated. The accounting entry involves debiting the relevant expense accounts (e.g., Office Supplies Expense, Travel Expense) for the amounts indicated on the vouchers, and crediting the Cash (bank) account for the total amount needed to restore the fund. This process ensures all expenditures are properly categorized and recorded in the general ledger.
Setting Up and Controlling Your Petty Cash Fund
Establishing a petty cash fund involves deciding on an appropriate initial amount. This amount should be sufficient to cover typical minor expenses for a set period, such as a week or a month, and not be excessively large to minimize risk. Cash is then withdrawn from the company’s bank account and placed into a designated petty cash box or drawer.
Assigning a single custodian for the petty cash fund is an important internal control measure. This individual is responsible for the fund’s safekeeping and for ensuring all disbursements are properly documented with receipts or vouchers. Regular reconciliation of the petty cash fund, perhaps weekly or monthly, is also important, comparing the remaining cash plus the total of all vouchers to the original imprest amount.
Additional control measures include setting a maximum limit for individual disbursements from the fund, which prevents large expenditures from bypassing standard payment procedures. The petty cash fund should be stored in a secure location, such as a locked drawer or safe, to prevent theft or unauthorized access. These practices help maintain the fund’s integrity and ensure its proper use.