Definition: Petty cash is the small amount of cash that is kept on hand by a company to pay for minor, inexpensive purchases during the normal course of operations. Petty cash is often used to pay for postage, small office supplies, and other small purchases.
What Does Petty Cash Mean?
This is the only amount of cash that is not immediately deposited in the bank account after it is received. Since companies have to safeguard cash from theft and fraud, internal controls in place to make sure employees and other people can’t steal it. The most basic internal controls involve removing cash from the business premises. For example, two internal controls are all cash must be deposited in the bank account the same day it is received and all disbursements must be made by check instead of cash.
The petty cash fund ignores both of these controls. The cash is kept on site, usually in a secured drawer or safe that can only be accessed by someone with authority to handle the cash. The purpose of the fund is to have some cash on hand in case a small purchase needs to be made. Most petty cash funds have less than $250 in them.
Example
This fund is accounted for like it was another bank account. Petty cash has it’s own asset account and is reconciled at the end of every period. In order to put money into the petty cash account, money has to be taken out of the business checking account.
The journal entry to fund petty cash would debit the account and credit to cash bank account. At the end of each period, the fund must be evaluated to see if there are enough funds for the future periods. If not, additional funds must be transferred from the normal business checking account.
