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How to Manage Business Petty Cash

When you need to reimburse an employee for an early morning coffee run, you may turn to the petty cash account. But small expenses can add up quickly, so it’s important to put a management system in place. What is petty cash, exactly, and how is it used? Here’s what you need to know.

What is petty cash?

Petty cash in business refers to a stash of cash set aside to pay for small expenses, usually in the realm of 50p to £250. Rather than writing a cheque or transferring large sums of money, you can turn to this dedicated account. Like the coffee run example above, petty cash is also used for things like:

  • Small office supplies

  • Postage stamps

  • Meals and snacks

  • Local travel expenses

  • Greeting cards

  • Flowers

Most businesses store small amounts of cash on the premises to pay for these types of expenses. Larger businesses typically have several locations for petty cash, often one per department. This is why it’s important to create a system for tracking all of these cash outflows, topping up each petty cash box when it runs low.

Petty cash in accounting

In accounting, this type of transaction is reported on the general ledger account for current assets, with a section entitled ‘petty cash’. One way to keep track of petty cash issued is to record each payment as an expense in the general ledger. When the account is replenished, petty cash reconciliation takes place in the form of an accounting journal entry.

How does petty cash work?

To get started, you’ll need to decide how much cash you want to keep in the petty cash box. You then must withdraw this amount from your business cash account, taking care to record this transaction as an initial petty cash journal entry. This would be a debit to your petty cash account, and credit to your cash account.

When an employee walks up and asks for access to petty cash, the issuer disburses cash from the fund. The employee uses the petty cash and returns with receipts for the expenditure. These should be saved in the petty cash book for accounting purposes later.

There’s no need to record a journal entry at this stage. Instead, the petty cash fund’s balance declines as it's used for small expenses. Cash is replaced by receipts. It’s up to the petty cash issuer to check from time to time in order to ensure that the account is in balance. In other words:

Remaining Cash + Receipts = Initial Petty Cash

However, it’s not uncommon for receipts to go missing or change to go unreturned, in which case this equation won’t always be in balance.

After the cash balance drops to an insufficient level to cover everyday expenses, the issuer must top it up. The first step is repeated, with the business owner or cashier withdrawing more funds from the cash account and collecting the receipts from the last round of funding.

Petty cash reconciliation

Once you have a collection of receipts, these expenses need to go into the general ledger for accounting purposes. You’ve already made an initial journal entry when establishing a petty cash account, so now it’s time to balance the books.

Remember, journal entries are recorded with a debit to the petty cash account, and credit to the cash account. Here’s a petty cash template to follow for this stage:

<table> <tbody> <tr> <td> <p><span style="font-weight: 400;">Account</span></p> </td> <td> <p><span style="font-weight: 400;">Debit</span></p> </td> <td> <p><span style="font-weight: 400;">Credit</span></p> </td> </tr> <tr> <td> <p><span style="font-weight: 400;">Petty Cash</span></p> </td> <td> <p><span style="font-weight: 400;">&pound;</span><span style="font-weight: 400;">250</span></p> </td> <td> <p><span style="font-weight: 400;">&nbsp;</span></p> </td> </tr> <tr> <td> <p><span style="font-weight: 400;">Cash</span></p> </td> <td> <p><span style="font-weight: 400;">&nbsp;</span></p> </td> <td> <p><span style="font-weight: 400;">&pound;</span><span style="font-weight: 400;">250</span></p> </td> </tr> </tbody> </table>

This establishes the original £250 placed into petty cash, taken out of your cash account.

Once the time comes to replenish the petty cash account, you’ll credit the account to reflect the total number of receipts. Along with this, you’ll be debiting the appropriate expenses accounts to reflect what the cash was used for, such as office supplies. For example, imagine that you spent £200 of the £250 on office supplies and need to replenish your petty cash.

Here’s a petty cash template to reflect this type of journal entry:

<table> <tbody> <tr> <td> <p><span style="font-weight: 400;">Account</span></p> </td> <td> <p><span style="font-weight: 400;">Debit</span></p> </td> <td> <p><span style="font-weight: 400;">Credit</span></p> </td> </tr> <tr> <td> <p><span style="font-weight: 400;">Petty Cash</span></p> </td> <td> <p><span style="font-weight: 400;">&pound;</span><span style="font-weight: 400;">200</span></p> </td> <td> <p><span style="font-weight: 400;">&nbsp;</span></p> </td> </tr> <tr> <td> <p><span style="font-weight: 400;">Cash</span></p> </td> <td> <p><span style="font-weight: 400;">&nbsp;</span></p> </td> <td> <p><span style="font-weight: 400;">&pound;</span><span style="font-weight: 400;">200</span></p> </td> </tr> </tbody> </table>

This shows the petty cash account topped up with £200 from cash.

<table> <tbody> <tr> <td> <p><span style="font-weight: 400;">Account</span></p> </td> <td> <p><span style="font-weight: 400;">Debit</span></p> </td> <td> <p><span style="font-weight: 400;">Credit</span></p> </td> </tr> <tr> <td> <p><span style="font-weight: 400;">Office Supplies</span></p> </td> <td> <p><span style="font-weight: 400;">&pound;</span><span style="font-weight: 400;">200</span></p> </td> <td> <p><span style="font-weight: 400;">&nbsp;</span></p> </td> </tr> <tr> <td> <p><span style="font-weight: 400;">Petty Cash</span></p> </td> <td> <p><span style="font-weight: 400;">&nbsp;</span></p> </td> <td> <p><span style="font-weight: 400;">&pound;</span><span style="font-weight: 400;">200</span></p> </td> </tr> </tbody> </table>

This second entry, using the double-entry bookkeeping method, shows the use of the £200 for supplies, based on the receipts. The petty cash account is now back to its original £250 base amount.

By setting up a petty cash account in the general ledger, keeping receipts for every expense, and balancing journal entries, you’ll be better able to manage business cash flow.

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