How to start a petty cash fund - Hedges Insurance

How to start a petty cash fund

accounting for petty cash

A petty cash fund is a current asset account that should appear on your balance alongside other cash accounts, such as checking and savings accounts. After recording the journal entry, the custodian should receive $300 cash or check from the owner or cashier. A petty cashier might be assigned to issue the check to fund the petty cash drawer and make the appropriate accounting entries.

The first step is always to ensure you have rules and procedures to guide decision-makers and other employees. Your petty cash accounting process will not have the desired effect unless you have a good petty cash policy in place. For instance, when branches spend cash on office supplies, food payments, delivery charges, etc., they qualify as a valid petty cash journal entry. The petty cash balance is present on the company balance sheet with cash in the bank and cash on hand. While petty cash funds only take care of small expenses, these funds still need to be managed correctly. Keeping track of these petty cash expenses helps you to capture all your tax-deductible expenses.

Step 5: Log petty cash

The head offices can increase or block balances in the petty cash fund (if required) centrally. Finance teams, custodians, and employees struggle with paper-based systems as they are time-consuming and highly susceptible to fraud and errors. In most cases, businesses accept that a certain amount of petty cash will undoubtedly be considered a write-off.

  • At all times, the custodian must maintain a balance of cash and receipts that exactly matches the original funding for the petty cash account.
  • This should be small enough that employees won’t be tempted to steal it but large enough that you don’t have to replenish it too often.
  • While the amount may be small, recurring losses can build up over time, proving to be a massive hassle for all companies.
  • The petty cash custodian pays out cash as requested in exchange for some form of evidence, such as a receipt or a voucher.

Every time a certain amount of petty cash is spent, the fund custodian should save a receipt. On a petty cash slip, the custodian can add the purpose and the date when the cash was spent or any additional information, depending on the company’s policy, and attach it to the receipt. A petty cash custodian should be designated to safeguard and make payments from this fund. At the time the fund is established, the following journal entry is needed.

How To Set Up and Manage a Petty Cash Account

When an employee takes money from the petty cash fund, the petty cash custodian must record who took the money, the amount taken, what the money is for, and the date. Any expense that’s too small to write a check for can be paid with cash from the petty cash fund. Note that it’s a good idea to set a maximum dollar amount petty cash for allowable expenses. In reality, the balance in the petty cash account is higher than the amount of cash actually in the petty cash box, since the cash in the box is continually being paid out. However, the difference is so minor that it is completely immaterial to the results in the financial statements.

accounting for petty cash

So, the ending balance in the petty cash log is the difference between the beginning balance and the total petty cash expenses. The amount left inside the box should be equal to the ending balance. On the other hand, petty cash is hard to keep track of, and it’s prone to misuse. Additionally, for smaller companies that don’t have an extensive accounting team and use accounting software instead, managing a petty cash fund can be a time-consuming task. A check for cash is prepared in an amount to bring the fund back up to the original level. The check is cashed and the proceeds are placed in the petty cash box.