Petty cash meaning
Petty cash is a small amount of cash on hand that is used for
paying small amounts owed, rather than writing a check. Petty cash is also
referred to as a petty cash fund. The person responsible for the
petty cash is known as the petty cash custodian.
Petty cash examples
Some examples for using petty cash include the following:
· Paying the postal carrier the 17 cents due on a letter being delivered
· Reimbursing an employee $9 for supplies purchased
· Paying $14 for bakery goods delivered for a company's early morning meeting
The amount in a petty cash fund will vary by organization. For some, $50 is adequate. For others, the amount in the petty cash fund will need to be $200.
When the cash in the petty cash fund is low, the petty cash custodian requests a check to be cashed in order to replenish the cash that has been paid out.
A petty cash voucher is usually a small form that is used to document a disbursement (payment) from a petty cash fund. Petty cash vouchers are also referred to as petty cash receipts and can be purchased from office supply stores.
The petty cash voucher should provide space for the date, amount disbursed, name of person receiving the money, reason for the disbursement, general ledger account to be charged, and the initials of the person disbursing the money from the petty cash fund. Some petty cash vouchers are prenumbered and sometimes a number is assigned for reference and control. Receipts or other documentation justifying the disbursement should be attached to the petty cash voucher.
When the petty cash fund is replenished, the completed petty cash vouchers provide the documentation for the replenishment check.
Replenishing the petty cash fund means the petty cash custodian requests and receives cash from the company's regular checking account in order to have the cash on hand equal to the amount reported in the general ledger account, Petty Cash.
Let's assume that Company X has a petty cash fund of $100 and Mary is the company's employee responsible for handling the petty cash transactions. At all times Mary should have $100 in some combination of cash and petty cash vouchers (receipts). Let's assume that Mary has $20.00 in cash and she has petty cash vouchers of $79.70. She knows that $20.00 is too little cash to have on hand. As a result she will request that a check be written from the company's regular checking account in the amount of $80 ($100.00 that is reported in the Petty Cash account minus the $20.00 that is actually on hand.) The replenishment means the cash in the custodian's possession will be returned to $100, even if the vouchers do not equal the amount needed ($80 in this example). The small difference will be expensed along with the amounts shown in the vouchers.
It is important to point out that the $80 check will be credited to Cash (the company's checking account). No entry will be made to the Petty Cash account.
To start a petty cash fund you need to open a general ledger account entitled Petty Cash. This will be an additional cash account that you could report either separately or have its balance included with other cash accounts when preparing a balance sheet.
Next you need to write a check for the amount that you believe is the amount needed for making small payments in your office. Let's assume that the amount will be $100. When processing the check you would indicate the account code for Petty Cash, so that the new account will be debited for $100.
You also need to designate one person to be the petty cash custodian. This person's name will be the payee of the $100 check. This person will then be accountable for the $100. At all times the custodian must have a combination of cash and petty cash receipts which add up to $100.
Just prior to issuing financial statements, the petty cash custodian should request cash for the petty cash receipts. This is known as replenishing the petty cash fund. This allows for the expenses to be included in the income statement and will result in the custodian having the $100 of cash that will be reported in the balance sheet. The custodian can also replenish the petty cash fund when there is little cash on hand due to a large amount of petty cash payments.
Petty Cash is a current asset account; it is part of a company's cash. A petty cash fund is established by cashing a check drawn on the company's regular checking account and giving the currency and coins to the petty cash custodian. No expense is involved in this transaction since the company is simply creating the asset account Petty Cash by reducing another asset account.
An expense occurs when the company pays the postal carrier for the postage that is due on the incoming mail. Another expense occurs when the company sends an employee to pick up some needed supplies. If these expenses are paid with money in the petty cash fund, the currency and coins held by the petty cash custodian will decrease and in place of that money the custodian will have petty cash receipts or petty cash vouchers. The expenses will be recorded in the general ledger when the petty cash fund is replenished.
In order to get the expenses entered in the proper accounting period, it is necessary to replenish the petty cash fund at the end of each accounting period. (This is done in addition to replenishing the fund whenever the currency and coins are low.)
An imprest system of petty cash means that the general ledger account Petty Cash will remain dormant at a set amount. For example, if the petty cash custodian is entrusted with a locking bag containing $100 of currency and coins, then the Petty Cash account will always report a debit balance of $100. This $100 is the imprest balance. As long as $100 is adequate for the organization's small disbursements, then the general ledger account Petty Cash will never have an entry again.
When the coins and currency in the locking bag get low, the petty cash custodian will request a check to replenish the coins and currency that were disbursed. Since the requested check is drawn on the organization's checking account, the Cash account (not the Petty Cash account) will be credited. The debits will go to the expense accounts indicated by the petty cash receipts, e.g. postage expense, supplies expense. In other words, the general ledger account Petty Cash is not involved in the replenishment. (Replenishment means getting the total of the coins and currency in the locking bag back to $100.)
Under the imprest system, the petty cash custodian should at all times have a combination of coins, currency, and petty cash receipts equal to $100, the imprest amount.
Control occurs through the review of the petty cash receipts attached to each check request for replenishment. It also occurs by occasionally confirming that the items in the locking bag do indeed add up to the imprest amount.
The Petty Cash account and its balance could be listed separately as one of the first assets in the current asset section of the balance sheet. This is likely the case at smaller companies.
At larger companies, the balance in the Petty Cash account is often combined with the balances in the other cash accounts and the total of the cash accounts will be reported as Cash or as Cash and Cash Equivalents. You will find Cash and Cash Equivalents as the first item in the current asset section of the balance sheet.