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Accounting for Petty Cash Transactions

Finance
Article
01/27/2016

Small companies designate petty cash funds for small, last-minute expenses. Buying lunch for staff, purchasing office supplies or postage are the types of expenses paid out of petty cash. Even though the amounts are small, petty cash expenses can add up to annual amounts that must be tracked for financial reporting purposes. For this reason, safeguarding and accounting for petty cash transactions should not be overlooked.

Petty Cash Procedures

Prior to the increased acceptance of credit cards and electronic payments, petty cash was kept on hand for small purchases. Today, with the increased usage of business credit and employee expense accounts, the petty cash account may also encompass smaller expenses for which a formal requisition is not required. Guidelines for the use of petty cash ensure the funds are used as management intends. Limits can be placed on the amount disbursed per request. For example, any expenditure over $25 might need to go through a formal check request process, while those below this amount can be paid from petty cash. Also, employees should be required to produce receipts when they request a petty cash transaction. This will assist with reconcilement of the petty cash account. If a physical petty cash box is maintained, the amount of cash on hand should be a set amount and replenished as needed.

Securing Petty Cash

Theft and misuse are two of the biggest risks of keeping cash on hand. Falsification of expense reports may be another issue. Even making small amounts of money easily accessible can become a temptation. Thus, loose cash should always be kept in a secure location, such as a locked box or small safe. Any reimbursement requests from petty cash should be recorded by a bookkeeper or other trained staff member. Proper accounting procedures for petty cash transactions assist with month-end reconciliation and picks up on differences that need to be investigated.

Expense Management

Tracking petty cash transactions also assists with expense management. If budget cuts are needed, often petty cash items are those that can be easily managed or eliminated. If a company frequently spends small amounts on office supplies throughout the year, it may be possible to budget for an annual amount needed. Larger purchases of the same supplies may qualify for a volume discount.

Accounting for Petty Cash

Accounting for petty cash is relatively simple. When an initial petty cash account is set up, a journal entry should debit the petty cash account and credit cash. This journal entry should also be used when petty cash is replenished. At month-end, expense receipts can be summed and grouped into expense categories. The related journal entries would include a debit to the proper expense accounts, such as postage expense and a credit to petty cash.

To aid in tracking cash, an online accounting system can provide an extra level of reassurance. If a bookkeeper adds the petty cash account into the chart of accounts and performs a month-end reconcilement, then petty cash is not a forgotten item at financial reporting time. Petty cash receipts can also be scanned by employees into an accounting system as they are received, rather than risk the loss of paper receipts during the month. For companies using petty cash, online accounting systems ensure that small cash expenses are recorded on a timely basis.

 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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