Definition
Petty cash is a small amount of cash that companies keep on hand for minor expenses, such as office supplies or meal reimbursements. It’s used for transactions that are not suitable for check or credit card payments due to their size or immediacy. For accounting purposes, a petty cash account is often set up as an imprest system, where an initial fixed amount is decided upon, spent, and then replenished to the original amount, with expenditures tracked and noted usually by a custodian.
Phonetic
“Peh-tee kash: wuht ih-t iz, hou ih-t’s yoozd aend uh-koun-tid fohr, ehg-zam-puhls”
Key Takeaways
- Petty Cash: What It Is: Petty Cash refers to a small amount of cash that a business keeps on hand to make small, miscellaneous payments. It is typically used for expenses that are difficult or impractical to pay by check, credit, or other forms of payment. Access to petty cash is usually closely controlled, often by a custodian, who ensures it is only used for valid company purposes.
- Petty Cash: How It’s Used and Accounted For: When petty cash is used, a receipt or slip should be filled out detailing the amount spent, what it was used for, and who authorized it. This helps maintain a record of how the funds are spent. Periodically, the petty cash should be reconciled, for which the total amount of receipts should equal the decrease in the petty cash on hand. If there’s a discrepancy, it must be explained and corrected. Once petty cash gets low, the custodian requests a check to replenish the cash. The accounting officer then debits the recorded expense transactions and credits the cash account to balance.
- Petty Cash: Examples: Some common uses of petty cash include payment for minor office supplies like pens and sticky notes, staff reimbursements for small purchases they made for the office, minor repair work, or small travel expenses like public transportation fare. In all such cases, the use of petty cash simplifies these small payments and reduces the need for processes like issuing checks or credit card transactions.
Importance
Petty Cash is an important financial term used in business, and it signifies a small amount of cash kept on hand for miscellaneous expenses. It’s crucial because it allows for the efficient handling of small, unplanned expenses without going through the cumbersome process of making a formal cash withdrawal. It’s accounted for through the ‘Petty Cash Account’ and usually kept under lock and key, tracked through a record, the petty cash log, and constantly audited for discrepancies. For instance, it can be used for minor necessities like office supplies or for reimbursing minor travel expenses. Thus, understanding and effectively managing Petty Cash is a key facet of healthy financial management in a business setting.
Explanation
Petty cash refers to a small amount of money kept on hand by a company to cover minor, yet necessary and unexpected expenses, thereby side-stepping the cumbersome process of issuing checks or completing an expense report for small amounts. Such expenses may include staff lunch, office supplies, postage, coffee, or reimbursing an employee for a miniscule company expense they covered out-of-pocket. The purpose of maintaining petty cash is the efficient and timely management of small, day-to-day operational costs, which can yield a smoother flow of business operations. It also provides an immediate solution for minor unpredicted necessities, avoiding delays that may result from corporate approval processes.The allocation and management of petty cash are overseen on an internal level, typically by a custodian or petty cash manager. This individual is responsible for the distribution of cash for minor expenditures, as well as maintaining accurate record-keeping for accounting purposes. When the petty cash fund runs low, the custodian submits a reimbursement request along with receipts which account for the cash spent. This is key to ensuring transparency and control over the company’s use of such funds. The total amount of cash plus the total of receipts should always equal the fixed amount determined as petty cash. For example, if a company sets their petty cash fund at $100, and $75 is spent, the custodian should possess $25 in cash and receipts adding to $75, hence balancing the petty cash fund.
Examples
1. Office Expenses: One of the most common uses of petty cash is found in regular office settings. These funds are often used for minor, day-to-day expenses such as stationery, occasional refreshments, or payment for small services. For instance, if employees need a packet of pens urgently, the office manager can quickly dip into petty cash rather than going through a more formal and time-consuming procurement process. In terms of accounting, every time the money is used, there will typically be a petty cash voucher to keep a track of the expense, which includes details like the amount, purpose, and date.2. Small Retail Businesses: Small businesses like cafes or boutiques often have a petty cash fund to handle minor and unanticipated expenses. For example, if a light bulb breaks and needs immediate replacing, or the cash register runs out of change during a busy moment, the manager can use the petty cash to get this done quickly. In terms of accounting, every withdrawal and deposit to/from the petty cash fund is recorded in a ledger to ensure proper management and auditing of funds.3. Hospitals or Clinics: In the healthcare industry, petty cash can be used for small but urgent requirements. For instance, a hospital may need to quickly purchase a particular medicine from a local pharmacy, or maybe make immediate payments to temporary staff or freelancers. Petty cash helps in maintaining the operations without any delay for such contingencies. From an accounting perspective, hospitals follow a structured system for managing petty cash funds where an appointed petty cash custodian must record every transaction. The balance of the petty cash is also regularly verified to detect any discrepancies.
Frequently Asked Questions(FAQ)
What is Petty Cash?
Petty cash is a small amount of cash that a business sets aside for small, incidental expenses. This could include expenses such as office supplies or refreshments. The amount varies based on the size and needs of the business.
How is Petty Cash Used?
When a minor expense arises, the business can use petty cash instead of issuing an official company check. The convenience of petty cash enables easier tracking of small expenditures and reduces administrative burden.
How is Petty Cash Accounted For?
Petty cash is tracked through a petty cash log, which records every withdrawal and replenishment. The log helps maintain transparency and ensures that the petty cash fund is never overdrawn. Receipts for all expenses should also be kept as a part of accounting records.
Can you give an Example of Petty Cash Use?
Sure, for instance, an employee may need stationery items and rather than having the business issue a check to the vendor, the employee can directly purchase it using petty cash. The cost is then deducted from the petty cash fund and the receipt is kept for accounting purposes.
When Should Petty Cash Be Replenished?
The petty cash fund should be replenished when the cash balance becomes low, or at a recurring period such as the end of the month. It is replenished up to the fixed amount that was originally designated for the petty cash fund.
What if Petty Cash Doesn’t Balance?
If the petty cash fund does not balance, it needs to be investigated immediately. Differences could be due to errors, theft, or failure to secure and track petty cash funds appropriately.
How to Prevent Misuse of Petty Cash?
Businesses can prevent misuse by designating a small number of trusted employees with access to petty cash, regularly counting the petty cash fund, and diligently maintaining the petty cash log with all the necessary receipts and records.
Is Petty Cash Tax Deductible?
If used for deductible business expenses, these can be claimed as a tax deduction just like any other business expenses. However, comprehensive records should be kept to support these deductions.
Related Finance Terms
- Imprest System: A system for managing and replenishing petty cash by maintaining a constant balance, with the amount spent being reimbursed periodically.
- Cash Vouchers: Documents used to record petty cash transactions. They contain information like the amount, date, and purpose of the transaction.
- Petty Cash Custodian: An appointed individual responsible for managing and disbursing the petty cash as needed.
- Petty Cash Reconciliation: The process of verifying the amount of petty cash left and matching it with the recorded amount to ensure accuracy.
- Petty Cash Log: A log where all petty cash transactions are recorded. It is used to track cash inflow and outflow, and to account for the petty cash fund.
