Definition

During the normal course of operations, numerous financial transactions are taking place within the company. In this regard, it is often challenging for companies to keep a proper track record of the expenses that they have incurred.

As a result, it might be challenging for companies to keep up to date with the expenses and ensure that they can properly maintain a ledger listing down all individual accounts for the expenses incurred.

Particularly in the case of small transactions, it is often challenging to keep a track record of all the expenses that have been incurred.

As a result, companies keep and maintain a petty cash book, so all such transactions, which are small or insignificant in nature, can be recorded under one head.

Petty Cash Book can, therefore, be described as a ledger that lists down all the petty cash expenses that the company has incurred over a specific course of time.

It includes balances and transactions, which, if otherwise individually managed, might be harder to keep track of. Hence, all such transactions are booked under the petty cash account.

Some examples of petty cash expenses include stationery costs, printing costs, and regular plumbing works. These expenses might be recurring or might be one-off, but the common denominator is that they are insignificant to be kept under the track in a separate account.

Key Features of the Petty Cash Book

As mentioned earlier, it can be seen that the petty cash book entails smaller transactions that take place within the company. However, there are some salient features of petty cash books common across all different petty cash books. They are included as follows:

  • A petty cash book has a debit and a credit side to show the incomings and cash outgoings from the petty cash account.
  • Just like a normal cash book, a petty cash book is periodically maintained across a month.
  • It has dates and other relevant columns that are supposed to be included for auditors (or accountants) to reconcile the amounts that have been disbursed as petty cash book payments at the end of the subsequent accounting cycle or the month.
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Example and Format of Petty Cash Book

Petty Cash Book format, and creation can be illustrated via the example given below:

Graze Inc. is a trading concern. They maintain a petty cash book. As per the company policy, the number of general expenses classified as petty cash is deposited in the petty cash account at the beginning of the month, followed by which due subtractions are made across the month. For the month ended November 30, 2019, Graze Inc. had the following transactions:

  • On 1st November 2019, Petty Cash had a previous balance of $2400.
  • As per company protocol, on 1st November 2019, the petty cash account was deposited in $3000.
  • During the month, the following expenses were incurred:
    • Casual labor charges: $250
    • Stationery charges: $450
    • Printing Charges:$300
    • Charitable Donations: $200
    • Office Cleaning Equipment: $180
    • AC repair: $320

This is the number of expenses that were incurred under Petty Cash by Graze Co. At the end of November 2019, the Petty Cash Book will look something like this:

DateParticularAmount DebitedDateParticularAmount Credited
      
1st November 2019Balance240031st November 2019Casual Labor1250
 Cash Deposited3000 Stationery450
    Printing300
    Charity200
    Cleaning180
    AC Repair320
      
30th November 2019Balance Carried Forward2700   

How to reconcile and review Petty Cash Book?

Reconciling and Reviewing Petty Cash Book is an integral part of internal control and should be prioritized by companies.

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Organizations need to ensure that they can periodically reconcile these differences to ensure no chance of fraud or any financial malpractice within the company.

Therefore, it is a good idea to have a monthly round-up of expenses paid by the company so that proper balance is maintained in the company.

The reconciliation and review process help organizations safeguard against any leakages because it is often harder to keep track of these expenses. However, a petty cash book maintains all balances that can be subsequently double-checked if there is a need to do so.

Importance of Maintaining a Petty Cash Book

As mentioned earlier, it can be seen that maintaining a petty cash book is very important for the company to ensure that there are proper reconciliation and review, which reduces the chance of error.

In the same manner, maintaining a petty cash book is also important because it helps the decision-makers have an idea about the expenses included in petty cash disbursements and how those expenses can be minimized if there is a need to do so.