Petty cash meaning in accounting
Whether small businesses or big organizations with several branches, all firms must have access to a small amount of cash for small expenses such as purchasing office supplies, food, or local delivery.
Arti is a small business owner. She hosts a party for all her employees. She pays ₹15,000 in cash to the food caterer. Do you think the expense is valid, and can she can deduct these expenses as petty cash expenses? Read on to know the answer!
Petty cash is a financial accounting based on the imprest system, where a fixed amount is available for expenses. The balance is replenished periodically based on the expenses and the total amount at the end of a period.
Petty cash accounting is maintaining an accounting record of such petty cash expenses.
It may seem like a small amount of cash. Still, it is essential to maintain the same appropriately, as mistakes or misappropriations can quickly add up to more significant reconciliation problems.
Petty cash accounting is, therefore, a necessary part of understanding the concept of petty cash.
What is petty cash in accounting?
To understand petty cash in accounting, you must first understand the meaning of petty cash. A petty cash fund is a small amount of money dedicated to minor expenses.
For instance, when branches spend cash on office supplies, food payments, delivery charges, etc., they qualify as a valid petty cash journal entry.
Like all other business expenses, you must support these expenses with petty cash receipts. You can file these away as proof of petty cash expenses and access them during regular bank reconciliations or audit processes.
Relevance for accounting:
The amount in petty cash can vary between ₹ 5000 and ₹ 20,000. The actual amount of cash varies based on the size of the branch and the petty cash transactions (frequency).
Generally, it would help if you appointed a cashier and a custodian responsible for the petty cash fund. The petty cash custodian and the cashier keep track of the petty cash transactions and the journal entries that must be entered in the accounting books.
Further, you must regularly reconcile these petty cash expense accounts with your regular and bank accounts to ensure no discrepancies.
The personnel is generally responsible for petty cash accounting (and funds).
- The Claimant- The person who claims the petty cash amount is called the claimant. They are also the people who will receive the settlement. (This may be the branch manager)
- Petty Cashier- A branch cashier plays an important role in petty cash accounting. The cashier is usually the person who prepares the vouchers against petty cash transactions.
- Petty Cash Authoriser- This person is usually a higher authority who can approve petty cash transactions.
Also, Read: What is Spend Management?
6 Steps to a petty cash fund and accounting system with an example
STEP 1: Do you have a petty cash policy?
The first step is always to ensure you have rules and procedures to guide decision-makers and other employees. Your petty cash accounting process will not have the desired effect unless you have a good petty cash policy in place.
The policy must detail the fund value, usage circumstances, rules to support such petty cash transactions (proof, permissions, etc.), periodicity of reconciliation, etc.
- Ensure you include a list of expenses that qualify as petty cash transactions.
- The policy must clearly state the rules regarding the appointment of custodians and cashiers. You must also mention how branches can transfer accountability (signatures of appointed persons).
- You must detail the procedures for maintaining cash registers, petty cash boxes, and accounting journals. Further, you must describe the specific internal control measures that must be in place to avoid errors and fraud.
- The need for petty cash funds may vary from department to branch. It depends on the activity (the more the activity, the more the need for petty cash). It would help if you clarified what accounts for petty cash and the limitations (expense type, amount, etc.)
STEP 2: Transfer of cash and installation of a lock box
The lock box will have cash and proof of expenses (receipts and other documents supporting the petty cash expenses). In this step of petty cash accounting, you will entrust the responsibility of the cash and the lock box to the appointed petty cash custodian.
The custodian must know that the lockbox must always stay locked (key in their possession) and never be left unattended. In accounting, you must treat petty cash funds as current assets.
It appears as a petty cash balance with other cash accounts, such as savings or checking accounts. Once the custodian records the entry in the branch’s accounting books, they must receive the cash against it.
For clarity, let’s look at an example.
To begin the process, the custodian or branch bookkeeper will make the following entries in the branch accounting books.
|Petty Cash Fund |
|₹ 5,000|| |
STEP 3: Recording and reimbursement of petty cash expenses
For small purchases, an employee must fill up a petty cash voucher detailing the expense and hand this over to the petty cash custodian. A petty cash voucher is a standard form that provides details of the person taking the cash, the expense date, the general ledger account, and the initials of the custodian.
Petty cash transactions or expenses must be supported by receipts (provided by the employee who incurs the cost). The petty cash custodian provides the employee with cash and records the expense in the petty cash log.
You must include all details such as date, description of expenses, ref number, amount, and payee information in the cash log. You can then save the receipts in the lockbox.
Let us look at how expenses appear in petty cash accounting.
A Sample – Petty cash log
|Beginning Balance of Petty Cash||₹ xxx.xx|
|Petty Cash Expense in Total||₹ xxx.xx|
|Final Balance||₹ xxx.xx|
|Refill Request||₹ xxx.xx|
STEP 4: Reconciliation in petty cash accounting
It would be best to regularly reconcile the cash balance in your petty cash lock box. The regularity depends on the custodian and the usage of cash. Since these accounts must be shared with the head office or the accounts payable divisions, it is better to reconcile the petty cash account before you ask for replenishment.
The reconciliation process is simple as it requires that the custodian replace the amount of cash removed with a receipt of the same value. It ensures that there are shortages in cash flow and no reconciliation challenges.
STEP 5: The process of replenishing cash
When the petty cash runs out or periodically (as may be decided by the management), branches or departments must reconcile their petty cash account. The custodian must post entries to debit expenses and credit the petty cash account.
After this, you must complete the bottom part of the cash log (as indicated in the earlier table). The custodian must ensure that the ending balance in the cash log must match the exact amount of cash in the lockbox.
STEP 6: Actual cash replenishment
Replenishing cash is the final step of petty cash accounting. Here, the management approves your petty cash log and cash replenishment. You must ensure that the physical cash is added to the lockbox and repeat the journal entries mentioned in the first step.
Reconciliation in petty cash accounting
The primary goal is to ensure that petty cash expenses are acceptable (per policies) and that the expenses match the receipts in the lockbox.
Here are a few steps for the reconciliation of petty cash accounting.
- You must know the initial balance or the starting petty cash fund.
- Once you open the lockbox, you can count the physical cash present in the box. If you deduct this from the opening balance, you will get what should be the total of the petty cash expenses.
- You must support all petty cash expenses with proof. To help you in the process, you may categorize the expenses into categories (cash advances, food, courier or delivery, etc.).
- When you add up the disbursements, you must note any discrepancies for further investigation.
- Depending on the policies, you may choose to ignore minor variances. For instance, some companies may feel it is not worth spending time on variances below ₹ 50.
- Finally, petty cash accounts are an important part of an organization’s financial statements. So, it is important that they balance and there are no discrepancies.
Suggested Read: Corporate Credit Card Reconciliation
Challenges in petty cash accounting
By its very nature, Petty cash is an expense that is difficult to control. An auditor who scans petty cash books in accounting is bound to find discrepancies. Furthermore, reconciliations are often challenging and frustrating since there is no visibility, making petty cash management necessary.
Here are some challenges in petty cash accounting.
1. Management role
You will find management and reconciliation of petty cash accounts most challenging depending on the management’s role. For instance, since these accounts are not part of the main financial books (individual branches or departments maintain them), the checks and balances may be different and, in some cases, insufficient.
2. Custodian’s responsibility
Since the custodian is bestowed with the responsibility of the cash and the lockbox, they bear the burden of maintaining and reconciling the petty cash account. A single person shouldering the entire responsibility may be too much, especially if the number and frequency of small payments are high.
3. Paper-based systems are error-prone.
Finance teams, custodians, and employees struggle with paper-based systems as they are time-consuming and highly susceptible to fraud and errors. In most cases, businesses accept that a certain amount of petty cash will undoubtedly be considered a write-off. While the amount may be small, recurring losses can build up over time, proving to be a massive hassle for all companies.
Quick Read: What is a Petty Cash Book?
Petty cash management software
An integrated petty cash management system will transform your time-consuming manual processes. The petty cash system can be completely integrated into the central expense management software system, making it a breeze to reconcile your accounts.
Further, the visibility and control over the accounts increase as data is available in real-time. Branch employees who spend petty cash need not save receipts or other proof as they can capture expenses through their mobile devices or using a corporate credit card.
Digital files with expense information and numerous insightful reports will not be available to CFOs and other stakeholders for better decision-making. Such a software solution helps with the petty cash accounting process, as everything is automatically reconciled without human intervention.
Petty cash management with Happay
Happay’s petty cash management system offers your head office the use of a dashboard that allows your finance team to manage everything online and from a central location (no more back and forth now!).
Your stores, branches, or departments can use dedicated Happay credit cards and an expense app to record all transactions. Among numerous other features, Happay helps to
1. Eliminates the physical movement of cash from HO to Branches:
With corporate cards, head offices or the management can release funds to these prepaid cards every time you ask for replenishment. Employees can use these cards for petty cash expenses.
2. Visibility on policy violations:
Happay’s Smart Audit takes care of policy violations even as employees file expenses in a report. Sometimes employees are notified and cannot proceed until the entry has been rectified. At other times, notifications may be sent as additional approvals may be needed to proceed with the expense claim.
3. The approval process is easy:
The expense management solution is designed, so it is easy to use. Both finance teams and approvers (managers) can use the same interface. The resultant information is accurate and relevant.
4. Cut down overheads in petty cash management:
You can eliminate many overheads in the form of safe transfer of cash (physical) to branches, paperwork, and time involved in maintaining petty cash books. The head offices can increase or block balances in the petty cash fund (if required) centrally.
5. Automatically reconcile petty cash accounts:
As the employees swipe their corporate cards for expenses, invoices are mapped to the card transactions (using mobile apps). Finance teams do not need to go through transactions for reconciliation individually. The system automatically does it.
6. Enable real-time cash visibility and control:
The smart-audit feature ensures that policy violations are addressed when employees file expenses. Any violations are notified immediately. Further, since the data is available in real-time, you have complete visibility of funds.
7. Data on category-wise expenses:
Since all petty cash expenses are done through corporate cards, you can take advantage of insightful data that may be arranged and studied in several ways.
Best practices in petty cash accounting
Cash set aside for minor expenses (it does not justify writing a check) is known as petty cash. These may be small expenses, but ignoring them can derail your accounting system (with small but consistent write-offs).
Let us look at some tips to follow for petty cash accounting.
- Estimating the right petty cash amount is critical as this will ensure that branches or smaller offices can cover their office expenses without replenishing them often.
- Rules and procedures are essential as they guide employees on methods to follow while incurring such expenses. Also, you must ensure clarity in the regulations to encourage employees to comply.
- Ensure the lockbox for the petty cash is secure and the custodian is aware of the rules and regulations.
- You must give access to the petty cash fund to only one person: the risk and lack of control increase with the number of employees having access.
- If you do not have a digital petty cash management system, you must insist that employees support petty cash transactions with appropriate receipts. The petty cash log must be up-to-date.
- You must balance the cash log and replenish the petty cash account periodically to better control the books and the account.
Also, Read: What are Business Expenses?
Tax deduction on petty cash
According to the law, you cannot make payments in excess of ₹ 10,000 in cash in a day. Such expenses cannot be deducted from your business income.
So, the answer to the question raised in the example at the beginning of the article is no. Arti cannot claim a deduction as it is above the ₹ 10,000 limit.
Income tax law treats petty cash expenses like any other expenses in petty cash accounting. However, there are limits to the amount that may be categorized as petty cash expenses.
The law states that any payment (in cash) above ₹ 10,000 will not be permitted and claimed as petty cash expenses.
The concept of petty cash accounting may be simple and easy to understand. However, considering the amount (and various other factors), it is easily misused. A petty cash management software solution provides an easy and effective solution to the problems that traditional businesses face.
Petty cash in accounting is a small amount of cash reserved for minor expenses for which you cannot justify writing a check. Petty cash is a current asset listed on the balance sheet’s debit side.
Petty cash is a current asset listed on the debit side of your business’s balance sheet.
Every branch or office with a petty cash fund must maintain a petty cash log. It would be best if you regularly detailed all your petty cash expenses in the log.
Petty cash is a current asset that uses cash expressly set aside for a reason. Petty cash refers to spending cash that a company has readily available. Yes, petty cash is a current asset. A current asset is any asset that will provide an economic benefit within one year.