Meaning of Petty Cash
Petty cash means the small amount that is allocated for the purpose of paying the small expenses which the company occurs in its day to day operations where it is unreasonable to issue the check and for managing the same custodians are appointed by the company.
Every organization requires cash for their day to day expenditures. Not every expense can be paid through a bank cheque or bank transfer. Small expenditure needs to be settled through cash only. At the same time, few receipts need to be settled in cash, such as scrap sales, etc.
In almost every organization, petty cash is an integral part of the accounting function and mostly taken care of by accounts personal only.
How Petty Cash Works?
Petty Cash is a small amount of cash that needs to be kept in the office for the utilization of small daily expenditures. A person who has the cash in the organization is generally called cashier. The same person is responsible for the appropriate accounting of each cash transaction done through him. All the incomes and expenses which are practically not possible to settle through a bank need to be settled none other than cash (no barter transaction in a modern economy).
Generally, the following expenditures paid in cash;
- Day to day snacks, tea for employees;
- Employee’s reimbursements – Occasional traveling, other reimbursements;
- Small bank charges – franking, Notary, etc.;
- For sending greetings or sweets to clients or customers on Diwali or other festivals;
Few incomes which may be taken into cash;
- Scrap sales – small amounts to unorganized vendors.
- Sale of old newspaper etc.
Usually, an organization estimates their periodical requirement of cash, i.e., weekly or monthly and according to that approves a limit which can be withdrawn from the bank from time to time to settle the cash expenses. A limit of cash possession with the cashier shall not exceed at any given point of time as approved by the management of the organization. The periodicity of withdrawal from a bank may differ from organization to organization as per their requirement. A small shopkeeper needs more cash rather than middle or big size organization as he needs to deal more with the unorganized sector who deals in cash only.
For a smooth transaction through cash, three persons are part of the transaction: preparer (Cashier), Authoriser ( Higher Management), and Receiver ( claimed by).
Petty Cash Format
Cash payment cannot be proved if the same is not settled after taking proper shreds of evidence into account. Hence a petty cash voucher format shall be created to put evidence in the process and shall be signed by the receiver of cash at the time of payment. A specimen of the voucher is as below;
A specimen of the petty cash format is below –
The above voucher contains the name of the voucher preparer, authorizer, and receiver as all the three are essential for the evidence of payment.
How to do Petty Cash Accounting?
Petty cash fund is created by cash withdrawing from the bank and handing over to the person who maintains a fund. In a smaller organization, the amount received from the debtor (in cash) shall also part of a cash
Contra – Petty Cash A/c Dr. xxxx
To Bank A/c xxxx
Receipt – Cash A/c Dr. xxxx
To Debtor A/c xxxx
#2 – Disbursement
Each disbursement is not recorded via journal entry as there may be much small amount disbursement for tiny expenditures (i.e., buying a postage stamp), instead of journal entry passed at the end of the day or after a particular period for the total amount disbursed.
Payment – Total Disbursement (expenditures head wise)A/c Dr. xxx
To Petty Cash A/c xxx
Narrations shall contain the total cash payment break up.
#3 – Replenishment
If cash balance becomes very low, then it is replenished via cheque.
Contra – Petty Cash A/c Dr. xxxx
To Bank A/c xxxx
Petty Cash Accounting Example
: XYZ LLP creates a petty cash fund of $15,000/- on 1 Apr 2016. During April 2016, following disbursement were made from cash fund:
Tea and snacks 1,256/-
Toll Tax 2,450/-
Printing & postage 1,550/-
Cleaning and Dusting 1,000/-
Office Supplies 2,800/-
Pass journal entries for the above transaction.
1 Petty Cash A/c Dr 15,000
To Cash at Bank 15,000
(Being Petty cash fund created or being amount withdrawn from the bank for the cash fund)
- Tea and snacks 1,256
Toll Tax 2,450
Printing & postage 1,550
Cleaning and Dusting 1,000
Office Supplies 2,800
To Petty Cash A/c 11,356
(Being disbursement from petty cash fund)
Journal entry for Petty Cash Receipts:
Petty Cash A/c Dr. xxx
To Sale of Scrap or News Papers xxx
(Being Cash received on sale of Scrap / News Papers)
How to Replenish Petty Cash Balance?
The petty cash balance shall replenish from time to time to accommodate further cash expenditures. However, the method of replenishment is most noted and depends on the cashier and his authorizer. There may be top management instruction on it, but in the absence of such guidance, cashier, according to his convenience, refill his cash balance. There are few methods which may help the management or authorizer in a way or two;
#1 – Petty Cash Float up
When an organization practices to operate a fixed float for cash as an organization wants, the cash should not befall below a level and should be in a range the top-up amount will always remain the same. The moment the cash touched the lower end of the scale, the cashier shall trigger and put a request for withdrawal from the bank. For example, if the float level is $20,000/- and $14,000/- has been spent, the cash balance remaining is $6,000/- and $14,000/- is needed to float balance back to the level of $20,000/-. Here $6,000/- is a lower end, and the withdrawal amount shall always be $14,000/- only.
This practice record all the payments made since the last top-up, as a basis for requesting the next top-up to the authorizer. The use of this method helps signatories to know what amount was spent on before withdrawing more cash from the bank.
The range of cash in possession of the accounts department at a given point of time is decided and approved by the management of the company.
#2 – Petty cash as required
Few small companies adopt a policy that results in the lowest balance of cash with the company as they only withdraw when it is required. For example, the company has the policy to reimburse employees every week, and hence in every week company came to know how much cash is required and that amount only withdrawn by the company.
This approach reduces the risk, and since there will be almost no cash balance with the company, few costs concerning insurance and protection of money can be avoided.
#3 – Unorganised Petty Cash Management
In closely held companies, where the owners directly involved in day to day business uses this approach, whereas they dictate the method of withdrawing the amount from the bank. No formal policy is in place to withdraw the amount and no limit over the possession of the cash. Further, there is no formal policy over cash, too, as the same is carefully looked over by the owners of the organization.
From a control and risk perspective, it is less risky as tightly controlled by-owner only. From a policy and accounting point of view, it is informal and shall be avoided.
Best policy – From the above three policies, float up is mostly used and appreciated by accountants across the globe as it provides flexibility as well as control both over the cash transaction.
Petty Cash Video
This article has been a guide to what is petty cash and its definition. Here we discuss how does petty cash works along with its format and examples. You may learn more about financing from the following articles –