What is Petty Cash?
Petty cash refers to the small amount of money in the form of notes or coins that organizations keep on-hand to cover minor expenses. This cash reserve is used for expenditures that are too insignificant to warrant writing a check or processing through accounts payable. Petty cash is managed and recorded in a petty-cash book to ensure that all funds are accounted for accurately.
Examples
- Office Supplies: Purchasing pens, paper, or other small office supplies that may be needed immediately.
- Employee Reimbursement: Reimbursing an employee for a minor out-of-pocket expense.
- Postage/Delivery: Costs associated with mailing documents or packages quickly.
- Miscellaneous Small Purchases: Buying snacks, minor decorations, or other small items used in day-to-day business operations.
Frequently Asked Questions (FAQs)
How is petty cash managed?
Petty cash is managed by a custodian who is responsible for maintaining the petty-cash book, issuing cash for expenses, retaining receipts, and reconciling the balance periodically.
How is petty cash recorded?
Every transaction from the petty cash is recorded in a petty-cash book, which should always reflect the actual amount of cash remaining in the petty cash fund.
Why do companies use petty cash?
Petty cash is used to streamline the payment process for small, immediate expenses, reducing the administrative overhead associated with processing checks or electronic payments for these minor transactions.
What controls are in place for petty cash?
Companies typically have policies and procedures that include limits on the amount of petty cash, requirements for receipts, periodic reconciliation, and audits to ensure funds are used appropriately.
How often should petty cash be reconciled?
The frequency of reconciliation varies by organization but is typically done on a weekly, bi-weekly, or monthly basis.
- Float: The balance of money in the petty cash fund.
- Imprest System: A system where the petty cash fund is replenished to its original amount at regular intervals.
- Reconciliation: The process of balancing the petty cash book against actual cash remaining in the fund.
- Expense Report: Documentation submitted by employees for reimbursement of business-related expenses.
Online References
- Investopedia - Petty Cash
- The Balance Small Business - What Is Petty Cash and How Is It Used?
- Corporate Finance Institute - Understanding Petty Cash
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Financial Accounting for Dummies” by Maire Loughran
- “Accounting Handbook” by Jae K. Shim and Joel G. Siegel
Accounting Basics: “Petty Cash” Fundamentals Quiz
### Which is the primary purpose of petty cash in an organization?
- [x] To pay for minor, immediate expenses without processing through accounts payable.
- [ ] To fund large capital expenditures.
- [ ] To maintain liquidity for the company.
- [ ] To pay employee salaries.
> **Explanation:** Petty cash is used to handle small, immediate expenses without the need for the more cumbersome process of accounts payable.
### Where are petty cash transactions typically recorded?
- [ ] In the main ledger
- [ ] In an expense account
- [x] In the petty-cash book
- [ ] In a separate petty-cash ledger
> **Explanation:** Petty cash transactions are usually recorded in a petty-cash book to ensure proper tracking and reconciliation.
### Who is generally responsible for petty cash management?
- [ ] The CEO
- [ ] Any employee
- [x] The petty cash custodian
- [ ] The accounting department only
> **Explanation:** A designated petty cash custodian is responsible for managing the petty cash fund and maintaining the petty-cash book.
### What is the imprest system related to petty cash?
- [ ] A system of credit for petty cash
- [ ] A way to account for large expenses
- [x] A system where the fund is replenished to its original amount periodically
- [ ] A type of bank account used for petty cash
> **Explanation:** The imprest system ensures that the petty cash fund is replenished to its original amount at regular intervals, providing control and simplicity.
### What should be done if the petty cash does not reconcile?
- [ ] Ignore the discrepancy
- [ ] Issue more cash into the system without reviewing
- [x] Investigate and explain the discrepancy
- [ ] Replace the petty cash custodian
> **Explanation:** Any discrepancies in petty cash should be investigated and properly explained to ensure accuracy and integrity in financial records.
### Which types of expenses are NOT typically paid using petty cash?
- [x] Large capital expenditures
- [ ] Small office supplies
- [ ] Employee meal reimbursements
- [ ] Postage and delivery
> **Explanation:** Petty cash is meant for small, minor expenses and not for large capital expenditures, which require more formal procurement processes.
### In what intervals should petty cash be reconciled?
- [ ] Annually
- [ ] Whenever there is time
- [x] Monthly, bi-weekly, or weekly, depending on the organization's policy
- [ ] At the end of every business day
> **Explanation:** Petty cash should be reconciled monthly, bi-weekly, or weekly to ensure accurate tracking and management of the funds.
### What is a primary control to ensure proper use of petty cash?
- [ ] Anyone can access the fund
- [ ] No need for receipts for small purchases
- [x] Requiring receipts for all transactions and regular reconciliation
- [ ] Keeping a verbal record of transactions
> **Explanation:** Requiring receipts for all transactions and conducting regular reconciliations are primary controls to ensure proper use of petty cash.
### How does the petty cash fund impact the cash account in the general ledger?
- [ ] It increases the cash account balance
- [x] It is a part of the overall cash balance but typically does not change unless replenished
- [ ] It is not related to the cash account
- [ ] It depletes the general ledger balance
> **Explanation:** The petty cash fund is part of the total cash balance in the general ledger and adjustments are made when it is replenished.
### What documentation should accompany a petty-cash transaction?
- [ ] A verbal agreement
- [ ] None
- [ ] Any form of note
- [x] A receipt or invoice
> **Explanation:** A receipt or invoice should accompany each petty-cash transaction to provide valid records for reconciliation and audits.
Thank you for exploring the importance of petty cash and tackling our quiz! Keep enriching your accounting knowledge!
