At the end of the period or year, the petty cash balance will be present on the company’s balance sheet with cash on hand and cash in the bank. It is not present in the company income statement, and it is not considered an expense. The most common way of accounting for petty cash expenditures is to use the imprest system.[2] The initial fund would be created by issuing a cheque for the desired amount. An amount of $100 would typically be sufficient for most small business needs as the expenses to be covered are for small amounts. The bookkeeping entry for this initial fund would be to credit Petty Cash and debit bank account.

If you’re ready to set up a petty cash fund for your office but aren’t sure where to begin, follow the simple steps below to have your petty cash fund operational in no time. To begin, have a secure place to store your petty cash funds, such as a lockbox or locked drawer. Most small businesses keep between $100 and $200 in petty cash to pay for these and other unexpected expenses. If you’re ready to set up a petty cash account for your business, we’ll guide you through the process. Most enterprises handle their business expenses through petty cash funds.

Which of these is most important for your financial advisor to have?

In the petty cash policy document, we should state that the petty cash fund is $500 with Heather Smith as the custodian. She should also sign the document to transfer the petty cash fund accountability to her. The reconciliation is straightforward—every time you take cash out of the box, you replace the cash with a receipt for the same amount.

Ask a question about your financial situation providing as much detail as possible. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The custodian would use the $176 to restore the amount of cash to $200.

  • After recording the journal entry, the custodian should receive $300 cash or check from the owner or cashier.
  • These expenses have no material effect and generally do not require a high level of authentication for their payment.
  • However, the petty cash custodian may perform weekly or daily reconciliation to keep track of the fund balance.
  • Since the amount involved is usually small, petty cash can be used immediately by employees who are previously authorised.

The person using petty cash does not have to initiate a purchase order for which multiple approvals are required. Since the amount involved is usually small, petty cash can be used immediately by employees who are previously authorised. Petty cash accounts are managed through a series of journal entries. Entries are needed to (1) establish the fund, (2) increase or decrease the balance of the fund (replenish the fund as cash is used), and (3) adjust for overages and shortages of cash. At the time the entry is made, the custodian will receive a $315 check that’s cashed and the money placed in the lockbox.

Creating a Petty Cash Fund

The company can keep a limit on the value of transactions so that the expenses are capped. A business debit card ensures that the money is held in an account where the money continues to earn interest. The transactions made using a business debit card must continue to be monitored along with the supporting documents. Any inconsistencies observed are highlighted by the monitoring officer.


When there is a shortage of cash, we record the shortage as a “debit” and this has the same effect as an expense. If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are recording revenue. If there were cash overage, the petty cash account would be debited and the cash over and short account would be credited.

This cheque would then be cashed to acquire the actual cash needed for payments. The Cash Over and Short account will be used to balance the entry when the cash needed to get back to the petty cash account does not match the total of petty cash vouchers. Remember, for all journal entries, total debits must equal total credits.

Definition of Petty Cash

Petty cash is a small amount of money (typically, no more than $500) that a company’s employees can use to cover minor expenses, such as, for example, the costs of milk for coffee or birthday cards. 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. Reconciliation of the petty cash fund should be done periodically to ensure that the fund’s balance is correct. The fund can be replenished back to the approved amount as required.

Main Purposes of Financial Statements (Explained)

Thus, using a petty cash fund avoids the need for making many entries for small amounts. Only when the fund is reimbursed, or when the end of the accounting period arrives, does the firm make an entry in the journal. For small businesses, petty cash expenses and receipts are recorded in the petty cash book.¹ This how to record a prepaid expense is generally a manual process, and the receipts for these entries are also kept in physical form. As cash is spent from a petty cash fund, it is replaced with a receipt of the purchase. At all times, the balance in the petty cash box should be equal to the cash in the box plus the receipts showing purchases.

While a petty cash fund may not be necessary if you work solo, if you have even one employee, it may be worth it to set up a petty cash fund to manage those unexpected expenses properly. To record the petty cash transactions for August, you would need to record the expenses as a journal entry. Since purchases using the petty cash fund are small, it’s typical to see purchase limits of $50 or less with a total account balance of a few hundred dollars. For example, say your small business provides specific services for local business owners.

Balancing the petty cash account usually occurs when the fund needs to be replenished. The petty cash custodian brings all the slips or vouchers to the business’ bookkeeper, cashier, or accountant. The petty cash receipts are logged into the company’s General Ledger as credits to the petty cash account, and probably debits to several different expense accounts. When the petty fund is replenished, usually by drawing on a company-issued check, it’s recorded as a debit to the petty cash account and a credit to the cash account.

However, the availability of petty cash doesn’t mean that it can be accessed for any purpose by any person. Often, a few individuals are authorized to approve disbursements and can only do so for expenses related to legitimate company activities or operations. The petty cash transaction is then recorded on financial statements. The expenditures or purchases made using this cash are not part of the journal entries. Next, the amount is withdrawn from the bank to settle cash expenses. Finally, the amount withdrawn – paper money or coins – is deposited with the custodian.