What is 'Petty Cash'
Petty cash is a small fund of cash kept on hand maintained by a custodian for purchases or reimbursements too small to be worth submitting to the more rigorous purchase and reimbursement procedures of a company or institution. Periodic reconciliations reveal any shortfall or overage in the fund, as receipts are used to calculate the fund balance.
BREAKING DOWN 'Petty Cash'A petty cash fund provides convenience for small transactions for which issuing a check is unreasonable. Some vendors may not accept company checks. In addition, the exact charges may not be known until the items are purchased, and issuing a check may not be feasible. A petty cash fund replaces the need for certain employees to have company credit cards. A petty cash fund delivers a quick opportunity to utilize funds, as opposed to other time-consuming internal processes for funding or reimbursement.
The use of a petty cash fund circumvents certain internal controls=. For example, instead of making payments in the form of authorized checks that are signed, payments to certain vendors are made with cash that was secured and withdrawn according to different procedures. The petty cash fund is safeguarded by a designated individual, and the funds are often kept in a locked location. Funds are withdrawn upon receipt of a signature from the appropriate employee, who is required to return any excess change and all receipts or documentation of the transaction.
The petty cash fund is reconciled periodically to ensure the balance of the fund is correct. The remaining cash in the petty cash fund is counted as well as the charges noted on all receipts. This summation should equal the original balance in the petty cash fund. If the calculated amount is less than the original balance, there is a shortage in the petty cash fund. If the calculated amount is more than the original balance, there is an overage in the petty cash fund.
Petty Cash Accounting Entries
The petty cash fund and petty cash transactions are still recorded on financial statements. When the petty cash fund is created, a journal entry simply restricts a small amount of money by debiting the petty cash fund and crediting cash. As transactions occur, no journal entries are made. Then, at the end of the period or upon the reconciliation of the petty cash fund, the receipts are used to verify the balance in the petty cash fund and code the transactions. A journal line item is recorded to an over/short account. If the petty cash fund is over, a credit is entered to represent a gain. If the petty cash fund is short, a debit is entered to represent a loss. The over/short account is used to force-balance the fund upon reconciliation.