Cash transactions are one of the most common activities within any company. Usually, these involve paying various parties or receiving cash from them.
However, most companies have transferred these transactions to their banks. This way, they have automated the system or made it smoother. However, companies still need cash at hand to handle various transactions.
Companies maintain a petty cash system to handle any money kept on hand. This system is straightforward. Usually, companies use an imprest system to manage that cash. Recording the journal entry for this system is not complex. Before discussing its accounting, it is crucial to understand the concept first.
What is Petty Cash?
Petty cash is system companies create to hold insignificant amounts of funds. Usually, they use these funds to pay for minor expenses. It is crucial for companies as it helps them continue their operations smoothly.
As mentioned above, most companies have transferred their money transactions to banks. However, petty cash ensures they have enough money to meet daily needs.
Petty cash lets companies avoid complex processes related to the banking system. Usually, banks allow companies to handle their cash better.
However, they require formal procedures, such as cheques, signs, authorization, etc. On top of that, they also come with additional charges that companies must pay to operate their bank accounts. For insignificant transactions, these are not feasible.
Therefore, companies use the petty cash system to handle funds. However, keeping significant amounts of money at hand can have some risks.
Companies can tackle this through various controls. One of these includes limiting the amount of money they hold in the petty cash system. Usually, companies use the imprest system to handle their petty cash funds.
Overall, petty cash refers to money held to fund minor purchases or expenses. Companies use this cash to avoid going through the complications of banking transactions.
Companies may also allocate petty cash budgets to various departments. Consequently, they can manage their petty cash funds more smoothly. When accounting for those funds, companies must reconcile different departments’ balances.
How to account for Petty Cash?
When accounting for petty cash, companies must consider various factors. Essentially, it includes any insignificant amount of money held in the office for small expenses.
However, it may differ from “cash in hand” that companies keep for other purposes. Nonetheless, the accounting for both items is similar since they involve spending or receiving money. The process is similar across all companies.
When accounting for petty cash, companies must record two types of transactions. These include receipts and payments. Usually, these are the only items that impact the petty cash account.
While other activities may also affect it, they are a type of the above two items. Similarly, the debit and credit side of the journal entries will always include the petty cash account.
The most common activity within the petty cash account is spending. Usually, it occurs when companies pay for expenses.
Most companies specify the amount of money the petty cashier can allocate to a specific payment. If an item exceeds that amount, companies deal with the reimbursement through other means. On top of that, they may also specify the areas or accounts that the petty cash can cover.
However, petty cashiers cannot spend money from the account without receipts. For most companies, it involves receiving funds from various sources. The most prevalent of these sources include the bank account. Usually, companies transfer funds from a bank account to a petty cash account. In some cases, companies may also receive money from debtors directly into this account.
The accounting for petty cash is straightforward once the source of the transaction is determined. Either way, companies use it as a debit or credit entry.
At the end of each accounting period, companies must close the balance on the petty cash account. They report this balance under the current asset section on the balance sheet. In most cases, companies include petty cash account balances under cash in hand.
How do you record the journal entry for Petty Cash?
The answer to how to record the journal entry for petty cash is not straightforward. As stated above, the petty cash account may include different types of transactions.
Based on those transactions, the journal entry will also differ. Usually, companies use “petty cash” to denote this account in their books. However, they may also use other names, like “cash in hand”.
As stated above, the most common source of transactions in the petty cash account is spending. These transactions involve paying for expenses incurred.
However, companies limit how much they can pay through this account. If payment is eligible under this account, companies can record the transaction. It will involve the affected expense account as a debit and the petty cash account as a credit.
Therefore, payments through the petty cash account will use the following journal entry.
|Petty cash account||XXXX|
On the other hand, companies must also account for any receipts in the petty cash account. As stated above, the most common source for these transactions involves the bank account.
Therefore, the journal entry will require companies to transfer the transferred amount between those accounts. Here, the bank account will be the credit side, while the petty cash account is the debit.
The journal entries for that transaction will be as follows.
|Petty cash account||XXXX|
Similarly, companies also receive petty cash from other sources. In most cases, it will involve receipts from customers. However, companies may also limit how much a customer can pay into this account.
If payment is eligible under that limit, companies can record it as a receipt into the petty cash account. In this case, the accounts receivable account will be the credit side.
The journal entry for petty cash received from customers is as follows.
|Petty cash account||XXXX|
|Accounts receivable account||XXXX|
A company, ABC Co., uses its petty cash account to deal with various transactions during an accounting period. The company has a limit of $2,500 for the cash it can hold.
During the accounting period, ABC Co. paid for various expenses from this account. The collective sum of those expenses was $2,000. Therefore, ABC Co. uses the following journal entry to record those transactions.
|Petty cash account||$2,000|
During the period, ABC Co. also received $500 from a customer as cash. The company decided to use this amount to reimburse its petty cash account. Therefore, ABC Co. recorded the transaction as follows.
|Petty cash account||$500|
|Accounts receivable account||$500|
Lastly, ABC Co. used its bank account to deposit $1,500 into the petty cash account. The company used this transaction to restore that account to its designated limit. ABC Co. used the following journal entries to record the transfer.
|Petty cash account||$1,500|
Petty cash refers to a system of holding insignificant sums of funds to pay for minor expenses. Companies use this system to keep money at hand to meet small needs as they arise.
On the other hand, they also put cash into this system through their bank account. The accounting for petty cash is straightforward. It usually involves recording two types of transactions, payments, and receipts.