Petty Cash

Petty cash, also referred to as the petty cash fund, is a small amount of cash on hand used for paying expenses too small to merit write a check. Periodic reconciliations reveal shortfalls or overages in the fund, as receipts are used to calculate its balance.

A petty cash fund provides convenience for small transactions for which issuing a check is unreasonable or unacceptable. Examples of petty cash fund uses include paying for a catered lunch for a small group of employees, purchasing a small number of inexpensive supplies, or reimbursing an employee for small work-related expenses.  Petty cash fund custodians are appointed to oversee the fund; custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, and dispensing funds.

The use of a petty cash fund circumvents certain internal controls. The availability of petty cash does not mean that it can be accessed for any purpose and by anyone.  Many companies employ strict internal controls to manage the fund.  Often, limited individuals are authorized to approve disbursements and can only do so for expense related to legitimate company activities or operations.  Transactions should be well documented and receipts retained for company records. Some companies appoint petty cash cashiers to keep the fund secure and only allow access to those authorized to access it.

The petty cash fund is reconciled periodically to verify that the balance of the fund is correct. The reconciliation process ensures that the fund's remaining balance equals the difference of the original balance minus charges detailed on receipts and invoices. If the remaining balance is less than what it should be, there is a shortage. If the remaining balance is more than what it should be, there is an overage.  When unbalanced, the source of the discrepancy must be identified and corrected.

The petty cash fund and petty cash transactions are still recorded on financial statements. When created, a journal entry 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 entry 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.