How to Set Up and Maintain a Petty Cash Account
A petty cash account is simply money kept on hand to pay for minor cash items such as stamps, office supplies, tips, parking tolls, etc.
It is easy to set up and will save you from writing a lot of small checks or using your personal funds.
What is a Petty Cash Account Used For?
Petty cash is a small amount of cash that a business has on hand to quickly purchase miscellaneous small expenses. The availability of petty cash is much more convenient then authorizing and writing a check for small and often infrequent purchases that are typically under $25. Some example uses of petty cash include:
- Consumable items such as coffee, plates, staff gifts, etc
- Reimbursing employees for small purchases they made on the companies behalf
- Food or snacks for a meeting or special occasion
- Making change for customers if the primary source of change is low
How to Set Up a Petty Cash Account:
- Write a check from your business’s bank account made payable to petty cash. Most businesses keep $100 in petty cash. The amount is up to you.
- Purchase a petty cash box and decide where you are going to keep it. To keep petty cash from disappearing, consider keeping it in a locked box that only you or an employee designated as the petty cash custodian, has the key to.
- Create a petty cash log (sometimes called a petty cash book) and petty cash request form (sometimes called a petty cash voucher). Smaller companies or companies that will seldom use petty cash can skip this step, but be sure to enter the journal entries when it is time to reconcile the petty cash.
If you have a double entry bookkeeping system, the initial recording entry would look like this:
DR Petty Cash $100
CR Cash $100
If you are using a computerized accounting system such as QuickBooks, you would use the check-writing window and fill it out exactly like your actual check. Then post it to a newly created “bank account” titled Petty Cash.
Using your Petty Cash Account:
Print out a petty cash form or petty cash voucher and keep in the locked box with your petty cash.
When you need to make a small purchase such as a book of stamps, take a ten or twenty out, make your purchase, and when you return…put the petty cash receipt (remember to always get a receipt) and change back in the box.
Record the date, amount, and type of transaction on the petty cash form.
When your petty cash fund gets low, you will need to reconcile and replenish it.
Petty Cash Reconciliation and Replenishing your Petty Cash Account:
You will need to reconcile your petty cash account before you replace the money in it.
Begin reconciling by adding up all the transactions on your petty cash form. This total plus the cash still in the box should always equal $100 or whatever you originally put in the box. This form of recording petty cash is called the imprest system. This makes recording keeping a little simpler, as there will be no additional entries to the general ledger account for petty cash.
Next write a check for the exact amount of the total expenses and replenish the account.
Record that check by posting the total petty cash expense to the proper accounts. An example would be if the petty account form listed $36.75 in office supplies, $17.60 in stamps, and $6.25 in miscellaneous expenses, you would record that replenish check for $60.60 as follows:
DR Office Supplies $36.75
DR Postage $17.60
DR Misc. Expense $6.25
CR Cash 60.60
Finally file your receipts and petty cash form. Note: For small expenses like tips that you cannot get receipts for…your petty cash form or petty cash voucher will be your source document.
Remember…at all times…the amount on of your petty cash form and cash in your petty cash box should always equal the original amount you started with.
Follow these simple petty cash procedures and save yourself a headache at tax time. It’s a great way to keep track of those small ticky tacky expenses that sometimes gets overlooked at tax time.