Petty Cash: Definition, Meaning, Accounting, Journal Entry, Example

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Most companies prefer conducting their cash transactions through banks. However, they also need small sums of money in cash form to pay for insignificant transactions. Companies manage this cash through the petty cash system. This system is prevalent in most companies and businesses. The accounting for the petty cash system is also straightforward.

What is Petty Cash?

Petty cash refers to insignificant sums of cash resources kept in hand to pay for small expenditures when they arise. Usually, this cash helps finance expenses that occur regularly. A petty cash system can also help companies finance incidental expenses. Although companies prefer conducting their money transfers through banks, these systems are also crucial.

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Companies usually keep petty cash in safe locations in the office. They specify the uses that this cash can finance. On top of that, companies also establish an amount below which expenses can be reimbursed through this cash. Most small companies use a central petty cash system throughout operations. However, larger organizations may divide this cash between various departments.

How does the Petty Cash system work?

Companies usually use the imprest system of managing petty cash. In this system, a company establishes a maximum amount for the cash it can keep. During a period, it uses this cash to pay for small expenditures. Usually, they may include the following.

  • Postage expenses.
  • Office supplies.
  • Food or entertainment expenses.
  • Reimbursing employees for expenses incurred during their work.

After that period, the company determines how much money it needs to replenish its petty cash. Usually, it transfers the money from its bank account to the petty cash system. Sometimes, companies may also keep small reimbursements received from customers to fund their petty cash. However, all these transactions occur under the internal control system.

What is the accounting for Petty Cash?

As mentioned above, petty cash is money used to finance insignificant or regular expenditures. These payments constitute the highest number of transactions happening in this system. Companies record any expenses paid through petty cash using the following journal entry.

Dr Expense
Cr Petty Cash

However, companies must also have funds to finance these expenses. Usually, companies transfer cash from their bank accounts into the petty cash system. It ensures there are sufficient funds to finance small expenditures when required. The journal entry for this transfer is as follows.

Dr Petty Cash
Cr Bank

Example

A company, Red Co., operates a petty cash system. Red Co. uses this system to pay for operational expenses below $20. During a month, the company used its petty cash system to pay for various expenses totaling $300. Red Co. used the following journal entry to record those transactions.

Dr Petty Cash $300
Cr Bank $300

On the other hand, Red Co. also transferred $500 into the petty cash system. The company used its bank account for this transfer. Red Co. used the following journal entry to record the transaction.

Dr Petty Cash $500
Cr Bank $500

Conclusion

Petty cash refers to small sums of money kept in office to reimburse small expenditures. Usually, companies use the imprest system to manage this cash. Two types of transactions are prevalent in this system. The first includes paying for expenses or reimbursing employees. On the other hand, it also involves transferring money from the bank account to keep as petty cash.

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