Petty cash is a part of an organization’s cash in hand, used explicitly for small day-to-day expenditures which are not required to have a complicated authorization process.
This amount is also used for all the expenses for which it is take too long to pay through bank transactions like issuing checks or bank transfers, and it is classified as current assets under the cash and cash equivalent section of the company balance sheet at the end of the specific accounting period.
These expenses have no material effect and generally do not require a high level of authentication for their payment.
Most organizations have set a limit for petty cash accounts and petty cash expenses to run smoothly without disturbing the daily routine.
The size of petty cash depends on the transactions that each organization has. A small organization that incurred few transactions should maintain a small amount of petty cash. A big organization with a lot of transactions should maintain a large amount of petty cash.
Usage of Petty Cash:
Petty cash is used for small purchases of day-to-day business. Following are some examples of petty cash usage:
- Payment for daily postage expenses
- Payment for daily supplies and stationaries
- Payment for daily kitchen expense
- Payment for a small amount of computers equipment
- Payment for a small amount of water or drink
- Payment for a small amount of employee’s cash advance.
- Payment for the company’s gasoline expenses
- Payment for purchasing the small gifts
- And payment for many other small amounts of items
Accounting for Petty Cash:
Accounting classification, measurement, and recognition of petty cash are just like the general rules applied to the cash account, as they are all current assets accounts of the company’s balance sheet.
It will be treated as a company’s current asset and would apply all the debit and credit rules used for current assets. Let’s have a look at the example:
Petty cash is not considered the expenses and is also not considered the liabilities of the expenses. When the company purchases the material amount of small items urgently by using petty cash, the company will need to record those expenses in its profit and losses under the correct expenses categories and derecognize the petty cash from the balance sheet.
It is the general practice to derecognize petty cash from the balance sheet in a total of a specific period, say weekly or monthly, or at the time the petty cash needs to reimburse as part of the company’s petty cash imprest system.
Example:
ABC ltd company has purchased some kitchen accessories from petty cash amounted to $200. How do recording these petty cash expenses?
This $200 petty cash is considered current assets in ABC Ltd’s balance sheet, and we will have to derecognize it when it is used to purchase something.
The counter entry for this transaction is the expenses that the petty cash is used for. In this case, the petty cash is used for purchasing Kitchen Accessories.
Solution:
Here are the journal entries for purchasing kitchen accessories using the petty cash of ABC:
| Date | Description | Account Class | Dr | Cr |
| Kitchen Accessories A/C | Expenses | $200 | ||
| Petty Cash A/C | Current Asset | $200 |
Like the assets when there is a transfer from cash in hand to the petty cash account.
It will be debited with the amount received, and when purchases are made by petty cash, the petty cash account will be credited.
Presentation of Petty Cash Account in Balance Sheet:
The company’s financial statements are mainly of 4 types. Each statement has its own purpose and presentation form. The main common four types are:
- Balance Sheet
- Income Statement
- Cash flow statement
- Changes in Owner’s Equity
The petty cash account will be shown in the balance sheet under the head of current assets. Or you can merge this account with the cash-in-hand account of the entity.
And thus present in the balance sheet. The hierarchy for petty cash will be like this on the balance sheet.
Total Assets
- Non-Current Assets
- Current Assets
- Cash
And Cash Equivalents
- Cash
- Cash In Hand
- Petty Cash
- Cash
- Cash
And Cash Equivalents
Let’s have a look at petty cash on the balance sheet
The other financial statement where the amount of petty cash is used is the statement of cash flow. Because for calculating the ending balance of cash, the petty cash amount should be combined with the cash in hand account.
Is petty cash fund expenses?
The company could use the petty cash fund that it has for the small expenses that will be recorded in its income statement during that period.
At the end of the period or year, the petty cash balance will be present on the company’s balance sheet with cash on hand and cash in the bank. It is not present in the company income statement, and it is not considered an expense.
Is petty cash a fund asset or liabilities?
Petty cash is not a liability. In fact, it is the current assets that have the same classification of cash on hand and cash in the bank.
The increase of it is on debit and the decrease of it is on the credit side. Petty cash is increased when the petty cash holder replenishes the cash amount up the what they have spent.
Internal Controls for petty Cash:
Strong internal controls should be applied in the company because the availability of cash does not mean that everyone can approach it and use it for any purpose.
There must be limited persons responsible for the usage of petty cash. The transactions should be well documented, and the company should retain receipts for future consideration.
Usually, it is kept in a safe box with proper segregation of duties between the person who use, record, and keek the petty cash. It is normally used petty cash voucher to have an adequate authorization of petty cash expenses.
It is also the recommended internal control on the petty cash to have it regularly counted by a different person who holds the cash, petty cash custodian, and reconciles with a cash balance at that counting time.
Conclusion:
The petty cash account is the sub-account of the main cash account. The main idea behind this sub-account is to meet the daily expenses and bypass the lengthy procedure of making cheques.
This is treated as the normal current asset of the company and recorded under the head of current assets in the balance sheet.
