Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology
In accounting, Cash is the main account when dealing with the inflow and outflow of money in a business. However, there are many times that businesses deal with such small amounts that taking the time to request and issue a check does not make much sense.
In your personal life, there are times that you will make large purchases, and other times that you will make smaller ones. You can think of a business Cash account the way that you would think of your savings account, and the Petty Cash account as a few bills and change that you keep in your pocket for immediate purchases.
To continue the analogy, let us assume that you are a parent and your child wants a piece of candy from a candy dispenser in the store. It would not make sense for you to have to go to the bank and request a cashier's check for 25 cents and then return to the store only to try to find a way to put the check in the machine to get your child some candy. It would take way too much time and may not even remedy the problem because the candy machine does not accept checks.
Businesses have some of the same problems when employees need a way to pay for small business related items quickly and on the spot. Only certain employees within a company are authorized to make withdrawals from the company's bank account. Everyone else must go through a formal process to request funds to be issued to pay for equipment, supplies, materials, payroll, etc.
It is still very likely that there is a process to get funds from the Petty Cash Custodian, but they are often much easier (and faster) than the normal process. The Petty Cash fund will usually provide reimbursements for small office expenses as long as the purchaser is able to supply the custodian with a receipt documenting the purpose and amount paid.
What Can Petty Cash Be Used To Buy?
There are hundreds of small, infrequent things that petty cash can be used for, and each company will have its own rules for their authorized (and unauthorized) use. Common purchases include items such as postage stamps, delivery fees, tips, tolls, parking fees, paper, pens, toner cartridges, and projector light bulbs. The petty cash custodian will keep track of its usage and notify the proper company officials (the accounting department) when the account is low and needs to be replenished - which typically happens every few weeks.
Establishing the Petty Cash Account
To establish the Petty Cash fund, there will be a journal entry to debit the Petty Cash account (increase an asset) and credit the Cash account (decrease a different asset). The custodian will maintain a separate record of how the money is spent and ensure that disbursements are only given according to the company's guidelines.
Replenishing the Petty Cash Account
When the amount of cash available in the petty cash fund gets low, the accounting process of putting funds back into the account are different from the way of initially funding it. There will not be any further debits to the Petty Cash account unless there is a decision to increase the amount of that fund.
Instead of debiting Petty Cash again, the accountant will take the summary provided by the Petty Cashier and post debits to the appropriate expense accounts that were used when the petty cash funds were spent.
For example, if there was initially $100 in the Petty Cash account and $20 was spent on postage, $30 was spent on transportation-related expenses, and $40 was spent on office supplies, then there would be debits to the Postage Expense, Transportation Expense, and Office Supplies Expense accounts and a credit to the Cash account. The $90 credit to the Cash account would be used to replenish the amount spent from Petty Cash so the process can begin again.
Petty Cash is an asset account that is used to pay for very small business purchases when going through a formal requisition process does not make sense. Petty cash funds are managed by a Petty Cash Custodian or Petty Cashier. Many times, employees will pay for authorized small items directly and then bring in a receipt for reimbursement.
The Petty Cash account is established by debiting Petty Cash and crediting Cash. When the funds in the petty cash account get low, the accountant will debit the expenses used from the past petty cash funds and credit cash. Funds withdrawn from the Cash account are used to bring the petty cash account back to its original balance.
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