Petty cash fund or simply petty cash may be defined as a small amount of money available for making payments related to small expenses without writing a check. It is also known as imprest cash sometimes. A separate general ledger account is generally prepared to record the petty expenses being incurred and report the available petty cash of the company. A petty cash voucher (for each expense incurred) is generally made for controlling the petty cash.
As far as the presentation of petty cash is concerned, it is presented in the current assets section of the balance sheet. Since petty cash payment is highly liquid; it is generally presented at the top of the balance sheet. Petty cash fund custodians are entrusted with overseeing the petty cash funds. His main duties may include: enforcement of rules and regulations in regards to petty cash payments, disbursing petty cash from the fund in exchange for expenditure related receipts, and also ensuring the timely replenishments of cash.
Examples of petty cash expenses
Some of the examples of petty cash expenses may include:
- Payment made for postage due.
- Reimbursements made to employees on account of small purchases of office supplies or other work-related expenses.
- Payment made for a catered lunch for a small employee group.
Benefits of maintaining petty cash book
There are various benefits of maintaining a petty cash book which may include:
- Reduction in a number of transactions: The reduced number of transactions is undoubtedly considered as the foremost benefit that one may have from maintaining petty cash book. Since many transactions are recorded in a petty cash book, the number of cash transactions in the cash ledger often tends to reduce.
- Reduction of errors: The chances of errors are also reduced because the head cashier generally takes into consideration the previous month’s accounts and accordingly disburses the advance for the upcoming month.
- Savings of time and labor: Since all the relevant petty expenses are recorded by the petty cashier; the chances of misuse are also minimized. Further, Petty cash fund custodian is provided with cash as and when required that helps in reducing the misappropriation of cash. It consequently helps in saving time and labor from the company’s viewpoint.
- Control on petty expenses: Generally, Petty cash fund custodian is appointed and he is made accountable for the management of the petty cash funds. In this way, a proper control mechanism is established over all the small cash expenses being incurred over the period.
Disadvantages of maintaining petty cash book
There are several disadvantages of maintaining a petty cashbook which are as follows:
- Accounting errors: Since there are no sufficient documents for tracking the petty cash sometimes, Petty cash may result in accounting errors. If a company is big in size, it becomes quite a tedious task for the company to keep a proper track of outgoing petty cash, and receipts which ultimately make petty cash system prone to certain accounting errors.
- Misappropriation of funds: There is always a possibility of misappropriation of funds when it comes to maintaining a cash book. Petty cash is sometimes considered prone to theft by the organization’s employees.
Accounting treatment of petty cash
In order to manage the petty cash in a much better way, generally, a petty cash receipt is required for each transaction. Further, a petty cash slip must be created that should indicate the amount, name of the employee and the relevant date. Whenever petty cash custodian or employee involves in the payment with petty cash, petty cash custodian should keep the receipt and attach that petty cash slip to the receipt for the purpose of the record.
Generally, a petty cash log is created in petty cash accounting for summarizing the transactions. Further, a petty cash journal entry is generally recorded when an individual puts money into petty cash fund and when money is disbursed from the fund.
An example of petty cash log is given below:
|Petty Cash Log|
|Purchase||Purchase Amount||Purchase Date||Account Affected||Employee|
Journal entry for putting money into the petty cash fund is as follows:
|Date||Account Title and Explanation||Post ref||
|(Adding money to petty cash account )|
Explanation: An increase in an asset is debited while a decrease in an asset is always credited. Since there has been an increase in the petty cash account, the Petty cash account is being debited. Further, there is a decrease in the cash balance, cash account has been credited.
Journal entry for removing money from the petty cash fund (e.g., for showing petty fund purchases) is as follows:
|Date||Account Title and Explanation||Post ref||Debit
|X/XX/XXXX||Account ABC (e.g. office supplies)||XXXX|
|Account XYZ (e.g. Postage stamp due)||XXXX|
|(Petty cash used for business expenses during the period)|
Explanation: An increase in expense is always debited while a decrease in an asset is always credited. Since there is an increase in an expense account; corresponding expense accounts are being debited. Further, there is a decrease in petty cash balance; petty cash account has been credited.
An alternative to petty cash
There are certain prepaid cards such as the PEX prepaid card which can serve as an alternative to petty cash. All the small expenses of the organization can be charged on the PEX card. The major benefit of using such cards is that every transaction can be digitally recorded and can also be audited in case of need. It further allows the finance team to suitably allocate the desired amount of funds to employees as required-anywhere and anytime. It somehow eliminates the need of keeping a petty cash drawer as the majority of the merchants are ready to accept payment through visa debit cards.
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