As the owner of a business, there are different things that you need to know about. From payroll management to bookkeeping, there are different tasks that business owners need to focus on, and in the same way, there are also numerous concepts that they need to be familiar with. One such concept that every business owner or accountant needs to know about is Petty Cash. You might think that petty cash simply refers to some cash, then this is not correct. This guide will tell you what is petty cash and why it is important for a business.
Understanding the Meaning of Petty Cash
Petty Cash is an essential element for every business, as it refers to the small amount of cash that businesses keep with them to spend on minor expenses. Things like office supplies, small reimbursements, and others are included in this, as issuing a corporate card for such things seems impractical.
The cash is maintained in a secure location, such as a locker, which allows easy access without disrupting the accounting process. Businesses also align their transactions with their financial statements regularly to maintain transparency and accountability. Understanding the petty cash meaning permits businesses to manage their micro-expenses efficiently without affecting any other internal process of the company.
How does Petty Cash simplify the transactions of a business?
Petty cash is a fund of a small amount from the company that is used in transactions for which issuing a check or a corporate credit card might seem unreasonable or unacceptable. The level of cash a company considers to be petty will differ; however, the majority of companies maintain a petty cash fund ranging from $100 to $500. The petty cash fund is used for the following kinds of transactions:
- Getting office supplies
- Sending cards to customers
- Purchasing flowers
- Catering to a small group of employees for lunch
- Paying an employee back for a small work-related expense
A petty cashier, also known as a petty cash fund custodian, is appointed to take care of the fund. Custodial responsibilities usually consist of enforcing petty cash rules and regulations, requesting replenishments of cash, and dispensing cash.
What is the process to record Petty Cash transactions accurately?
Petty cash funds are still reflected in financial statements even when the fund is in use. Only in cases when the custodian asks for more cash, journal entries are made, not when purchases are made with petty cash. The journal entry for increasing the petty cash fund is a debit to petty cash and a credit to cash.
When a shortage or overage occurs, a single journal entry is recorded to an over/short account. In case the fund is over, an entry of credit is made to show a gain. If the company is short on the petty cash fund, then an entry of debit is made to represent a loss. The over or short account is utilized to reconcile the fund and achieve a forced balance.
Learning about petty cash is an essential concept for every business, as it allows them to complete everyday tasks that require a small amount of money.
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