Expenses under $25.00, such as taxis, stamps, and office supplies, can now be reimbursed more easily for both employees and visitors.
The financial accounts for petty cash shall be reconciled on a regular basis, and all transactions will be recorded. Greater corporations may have separate petty cash treasuries for different divisions.
Table of contents
- Petty Cash - What Is It?
- Petty Cash Requirements
- Keeping Track of Petty Cash
- Petty Cash Reconciliation
- The Benefits and Drawbacks of Petty Cash
- Where Can You Purchase Money Orders?
- What is the procedure for cashing a money order?
- What Is the Process of Accounting?
- Acquainting yourself with the eight-step accounting cycle
- What's the Difference Between the Accounting and Budgeting Cycles?
- What Are Some of Accounting's Advantages and Disadvantages?
- How to Keep Track of Petty Cash?
- How to Create Petty Cash Accounts?
- Key Takeaways
Petty Cash - What Is It?
There are many different types of petty cash funds that can be used to pay for things like office supplies and employee reimbursements, among other things.
When sending a check or utilising a company credit card is difficult or impossible, a little amount of petty cash comes in handy. According to the amount of money that a company considers petty, can range from $100 to $500.
These funds are looked after by people known as petty cash fund custodians. Custodial responsibilities include enforcing petty currency rules and regulations, getting replenishments, and disbursing cash.
Petty Cash Requirements
Some internal controls can be circumvented with the help of petty cash. Petty cash. However, just because petty cash is available does not imply that everyone can use it for any purpose whatsoever.
Many companies have strict internal procedures in place to handle the fund's administration. Only expenses directly related to a company's legal activities or operations can be approved by a small number of people who are normally given that authority.
There may be a person appointed to issue the check and make the necessary accounting entries to finance the Petty Cash Drawer.
When it comes to petty cash, the petty cash manager is in charge of making sure the money is properly accounted for and that all purchases and other expenditures are documented. Receipts are expected to rise, but petty cash is expected to fall, bringing the total removed to a positive number.
To ensure that only those who are authorised have access to the funds, a petty cash cashier and a petty cash custodian are employed.
Keeping Track of Petty Cash
Even when a petty cash fund is used, the transactions are still recorded on the financial accounts. No accounting journal entries are created when petty cash purchases are made.
Instead, the journal entries are made when the custodian needs more cash and receives additional dollars in return for the receipts. The petty cash fund is debited and the cash journal is credited when you give the custodian more money.
A journal line entry is recorded to an over/short account if there is a shortage or overage. If the petty cash fund is depleted, again is recorded as a credit. A debit is written to show a loss if the petty cash fund is depleted. When the fund is reconciled, the over or short account is used to force-balance it.
Petty Cash Reconciliation
The petty cash fund is reconciled regularly to ensure that the amount is proper. When the petty cash balance falls below a certain threshold, the custodian usually asks the cashier for more money.
The total of all revenues is determined at this point to ensure that it matches the funds disbursed from the petty cash drawer. If additional funds are required, the cashier issues a fresh check to replenish the petty cash drawer and accepts the receipts from the purchases that depleted the cash.
The reconciliation process ensures that the remaining balance of the fund is equal to the difference between the original balance and the charges stated on receipts and invoices.
There is a shortage if the remaining balance is less than it should be. There is an overage if the remaining balance is more than it should be. Although modest differences are possible, when they occur, the source of the imbalance should be discovered and remedied.
The Benefits and Drawbacks of Petty Cash
In many circumstances, cash remains the quickest, simplest, and most convenient method of payment. It's ideal for covering tiny unforeseen costs, such as a tip for the child bringing pizzas to the lunch meeting or cab fare home for staff who work late. It eliminates the trouble of reimbursing employees or requiring them to pay for work-related expenses out of pocket.
Petty cash can also be used for everyday purchases like milk for the workplace refrigerator, stamps, or cleaning materials.
While it shouldn't be done regularly, petty cash can be utilised to make changes for consumers if the cash register is running low.
On the other hand, petty cash's convenience can make it a nuisance and a risk. Cash is difficult to secure and track, and bills can easily vanish without a trace—even if you've set up a meticulous system of records or vouchers.
Another disadvantage of petty cash funds is that they require extra labour to maintain, keep records, and reconcile them regularly. This may be a minor annoyance in large organisations with an office manager or accounting staff, but it could be a strain in small businesses.
Even in small businesses and restaurants, where purchases have traditionally depended primarily on money, commercial transactions are becoming increasingly cashless. Some critics argue that petty cash has become obsolete.
Between credit cards, debit cards, payment services like Venmo or Paypal, electronic wallets, and other contactless ways to buy items, there are lots of alternatives to cash that are traceable, safe, and less vulnerable to theft.
Small businesses are typically concerned about security because they believe that having cash on hand invites crime.
Where Can You Purchase Money Orders?
After you've decided on a money order, the following step is to decide where you'll get it. Money order purchases are still mostly a paper and in-person sector, despite the emergence of online providers. However, finding a money order facility near you should not be difficult.
Money Order Scams to Avoid
Money orders have the disadvantage of being vulnerable to fraud and have become a common deception tool for fraudsters. As a result, the design of money orders has developed to include a variety of security and anti-counterfeiting elements.
Look for several signs that can tell you whether a money order is authentic or not, from watermarks and security strips to rainbow ink patterns and UV-light features.
What is the procedure for cashing a money order?
If you get a money order, you have two options for turning it into cash. You can pay it in at a money order redemption site and receive cash. You can even deposit it like a check in your bank account. However, both come with drawbacks.
Converting it to cash provides the quickest access, and you may be able to avoid the problem if the money order is later discovered to be counterfeit or fraudulent.
Buying money orders is more convenient than redeeming them. Some convenience stores, for example, sell money orders but do not cash them. In theory, post offices will cash orders, but if your money order is substantial and the post office is in a small town, they may not have enough cash on hand to redeem it.
There may be a cost associated with cashing it in. It's better to redeem a money order through the same company that issued it. Take a money order from the postal service to a post office, a Walmart money order to Walmart, and so on.
You'll probably avoid any redemption fees this way. However, just like buying money orders, it's a good idea to phone ahead to confirm that a business can accept your redemption and to inquire about any fees.
You can also deposit the money order into your bank account much like a check. This has the advantage of safely depositing the payment into your bank account rather than walking away with a large sum of money you may not want or need.
Be aware, however, that placing a money order may not be as simple as depositing a check, depending on your bank. Although you may be used to making mobile bank deposits with your smartphone, certain banks do not allow you to deposit money orders electronically and instead require you to visit a location. Your bank may not accept money order deposits at all if it is an online-only organisation.
Whether you opt to cash your money order or take it to your bank, remember to carry photo identification and wait until you're at the counter with a clerk or teller who will accept it to endorse it.
A bank issues a cashier's check, which is a sort of official check. A certified check, on the other hand, is a check written on a depositor's checking account that the bank verifies has adequate funds to pay.
A cashier's check also requires the signature of a bank representative because the money is drawn from the bank's account. A certified check, on the other hand, has the bank certifying that the customer's signature is real.
When you buy a cashier's check, the bank transfers funds from your checking or savings account to its account. The bank then issues a check to the individual or company you need to pay. A cashier's check is usually subject to a fee, with the average price at the nation's top banks averaging around $10.
The advantage of utilising a cashier's check instead of a personal check or cash to pay someone (or receive payment) is that it is secure. The check will not bounce since the bank takes the money immediately from your account and deposits it into its own.
This ensures that anybody you need to pay will receive the funds. You also won't have to worry about overdraft or non-sufficient funds (NSF) fees, which are incurred when your account doesn't have enough money to cover a check.
However, cashier's checks aren't completely secure, and fake cashier's checks can be used in financial fraud. You may receive what appears to be an official cashier's check, which you deposit into your account.
Your bank, on the other hand, may learn that the check is a forgery weeks later. If someone you don't know tries to pay you using a cashier's check, check with the bank whose name appears on the check to be sure it's genuine before depositing or cashing it.
Money orders are also a more secure method of payment than personal checks. You can receive them through the US Postal Service, convenience stores, drug stores, grocery stores, and check-cashing companies, in addition to banks. These same locations will usually cash a money order they've issued, or you can deposit one into your bank account.
When buying a money order, you must pay with cash, a debit card, or traveller's checks. Credit cards and personal checks are often not accepted. If you pay with a credit card, it may be considered a cash advance.
Money orders, like cashier's checks, have a cost, but they're inexpensive. The price may be less than $1 or as much as $5, depending on where you purchase the money order and how much it is for.
Replacing a lost or stolen money order is sometimes as simple as going to the store where it was purchased with your receipt and requesting a replacement or refund. You may be charged a price to replace a money order, but you can get it straight away rather than waiting months for a cashier's check to be reissued.
Cashier's checks are the best alternative if you need to make a large payment, such as for a car or boat. In rare cases, you may be forced to use a cashier's check. A cashier's check, for example, may be required if you're purchasing a home and need to pay the remainder at closing.
Smaller payments or situations where writing a personal check is not possible are better served by less expensive money orders. 8 It's possible to use money orders to pay the rent or to transfer a few hundred dollars to a friend who is short on money.
What Is the Process of Accounting?
There are eight steps in the accounting cycle, which is how a business's books are kept in order. There are detailed instructions for recording, analysing, and reporting a company's financial operations.
At least one accounting cycle is followed during each reporting period. Being organised throughout the entire process can be a crucial part of keeping overall efficiency high. If you have a lot of reporting to do, the accounting cycle will be longer. However, quarterly or annual results may be more important to a small percentage of companies than monthly ones.
There's no doubt that most bookkeepers will be kept abreast of the company's financial status daily. Setting the length of each accounting cycle is crucial since it establishes specific start and end dates. The eight-step accounting technique is restarted at the beginning of each new accounting cycle.
Acquainting yourself with the eight-step accounting cycle
Individual transactions are recorded in an eight-step accounting cycle, which ends with a summary of all of the company's actions throughout the cycle period. Many organisations utilise accounting software to speed up the accounting process. This allows accountants to schedule their reporting cycles and receive automated reports.
Depending on the company's system, more or less technical automation may be applied. An accountant may be called upon at various points to assist in the accounting process because of their knowledge of accounting procedures.
The eight-step accounting cycle must be adapted to fit the specific business strategy and accounting procedures of each company. It's common for people to worry about the difference between accrual and cash accounting.
In addition, single-entry vs. double-entry accounting is an option for businesses. A company's income statement, balance sheet, and cash flow statement must all be created using double-entry accounting.
The accounting cycle begins with the identification of transactions. There will be many transactions in a business's accounting cycle. For each, accurate documentation in the company's books of account is required
All transactions necessitate the keeping of records. Many firms use point-of-sale technology linked to their accounting software to record sales transactions. In addition to sales, there are a number of costs to take into account.
Keep a journal of your transactions
The second step in the cycle is the creation of journal entries for each transaction. Although POS technology can help firms combine processes one and two, they must also maintain track of their expenditure.
Accrual or cash accounting determines when transactions are formally documented. Due to the requirement of matching revenue and expenses in an accrual accounting system, both must be recorded at the time of sale.
Cash accounting necessitates the recording of all transactions when money is received or paid. Double-entry bookkeeping necessitates the recording of two entries for each transaction in order to effectively manage a well-developed balance sheet, income statement, and cash flow statement.
In a double-entry bookkeeping system, each transaction has an equal debit and credit. Keeping track of a chequebook is analogous to single-entry accounting. To get the balance report, it doesn't require any more submissions than it already does.
A transaction should be posted to a general ledger account once it has been documented as a journal entry. In the general ledger, all transactions are categorised according to account.
A bookkeeper can use this to keep track of account financial statuses and conditions, making it easier for them to do their job. This account, which shows how much money is available, is frequently referred to in the general ledger.
Before, keeping a paper ledger was a need for recording transactions, but because nearly all accounting is now done electronically, the ledger is no longer necessary because all transactions are automatically recorded.
Trial Balance Unadjusted
During the fourth step of the accounting cycle, the end-of-period trial balance is calculated. The company's unadjusted account balances are shown in a trial balance, which is a financial statement. The trial balance is then sent to the fifth phase for testing and analysis.
To begin, all transactions must be recorded in the ledger when the accounting period has ended and all documentation has been completed.
To ensure that the overall credit and debit balances are equal, this step is necessary. This stage can catch a great deal of mistakes if the numbers don't match.
The analysis of a worksheet for modifying entries is the fifth phase in the cycle. A worksheet is used to ensure that the debits and credits are equal. Any discrepancies must be addressed.
Accrual accounting may necessitate revising entries for revenue and cost matching as well as troubleshooting.
Adjustments to the Journal Entries
In the sixth phase, a bookkeeper corrects errors. Journal entries are made if modifications are necessary.
Statements of Cash Flow
After all, adjustments have been made, the company generates its financial statements in the seventh phase. For most organisations, these financial statements will include an income statement, a balance sheet, and a cash flow statement.
Closing the Books
In the eighth phase, a corporation closes its books at the end of the business day on the designated closure date to complete the accounting cycle. As a result of the concluding remarks, an evaluation of performance over time is possible.
After the accounting cycle closes, a new reporting period begins and the accounting cycle begins again. Closing is an excellent time to file documents, plan for the next reporting period, and go through a schedule of upcoming activities and duties.
Cash Management Pitfalls to Avoid
Growth necessitates financial resources.
One of the most prevalent corporate goals is expansion, but it is not without risk. It can also be very expensive. It's conceivable that you'll require 50 percent or perhaps 100 percent more money than you estimate.
Growth for a manufacturing or other B2B company may imply bringing on larger customers, which can improve revenue significantly. However, the impact of these new consumers on your cash conversion cycle is not usually anticipated.
That new consumer will almost certainly demand the terms of payment. This can swiftly deplete a company's cash reserves. Growth on a global scale might have the same effect.
Despite the world's rising speed, doing business overseas might imply lengthier lead times with suppliers and longer delivery periods to clients, lengthening the cash conversion cycle yet again.
Before you need it, inquire about bank financing.When you have no other options, it is the worst time to seek bank credit. You should approach your bank from a position of strength, as with any business. This reduces their risk and allows you to negotiate far better rates.
A competent lender exists to assist your company, but they can only do so if they are taking on manageable risks. Customers who can show a plan and look into the future of their firm are highly valued by banks.
By carefully assessing the financial requirements for the firm over the following 6, 12, 18, or more months, you may seek the best offer and almost certainly assure adequate liquidity to sustain that future.
Seasonality - Be Prepared for Ups and Downs
Seasonal companies abound. However, the majority of those same enterprises do not handle their funds properly. Don't fall into the trap of thinking the business has turned a new page after a big month or quarter by burning too much cash in the short term. If you work in retail and Q1 is typically slow, keep cash on hand even after the busy Christmas season.
Make provisions for large outflows.
Large outflows can generate substantial cash issues for many firms, depending on how regular their cash flow is. This can apply to expenses that occur once a year, quarterly, capital expenditures, or even payroll weeks.
You should save aside funds during normal periods or times of surplus to avoid a cash crunch owing to timing. For an annual expense such as an insurance premium, set aside a monthly amount so that the funds are accessible when the renewal period arrives. A similar method can be done for payroll in very fluid cash flow organisations, reserving quantities of funds in off-payroll weeks.
What's the Difference Between the Accounting and Budgeting Cycles?
The accounting cycle differs from the budget cycle in that the accounting cycle collects and analyses transactions after they have occurred. The budget cycle is an estimate of revenue and expenses for a future period of time that has not yet happened. Past accounting statements can be used in a budget cycle to estimate revenues and expenses.
What Are Some of Accounting's Advantages and Disadvantages?
Accounting benefits include taxation, decision-making, business valuation, and providing information to key stakeholders such as investors and law enforcement.
Some downsides include the possibility of bias, the ability to guess to a degree, manipulation, and the fact that the units used to assess corporate performance, particularly cash, fluctuate in value.
Even if petty cash is a small amount, the transactions done with it are reflected in the organization's financial accounts. When petty cash is used to make a purchase, accounting journal entries are not created.
When the person in charge of this fund needs additional money in exchange for the invoice, bills, or receipts, it is documented. Only when the petty cash custodian is issued excess cash or when a substantial sum is deducted or credited to the petty cash is a journal entry generated.
How to Keep Track of Petty Cash?
Petty cash is a small sum of money maintained on the premises of a business to cover minor monetary needs. Office supplies, cards, flowers, and other such items are examples of these payments.
Petty cash is kept in a petty cash drawer or box close to where it is required the most. In a larger company, there may be numerous petty cash locations, one per building or even per department. Petty cash transactions are tracked using a separate accounting system.
The System of Petty Cash
The cashier creates a check in the amount of the funds assigned to a specific petty cash fund to form a petty cash fund (usually a few hundred dollars).
If there are enough notes and coins on the premises, the cashier could simply count out the money for the petty cash fund. A debit is made to the petty cash account and a credit is made to the cash account in the first petty cash journal entry.
The petty cash custodian then distributes petty cash from the fund in exchange for receipts about the expenditure. There is no journal entry at this time; instead, the petty cash fund's cash balance is decreasing while the number of receipts is increasing.
At all times, the total of the receipts and remaining cash should equal the amount of petty cash funding. However, due to recording errors and theft, the original funding amount may differ.
When the petty cash fund's cash balance falls below a certain threshold, the petty cash custodian requests more cash from the cashier.
This takes the form of a summary of all receipts accumulated by the custodian. The cashier writes a new check in the amount of the receipts and replaces the receipts with the check. A debit is made to the petty cash account and a credit is made to the cash account in the petty cash journal entry.
The petty cash custodian replenishes the petty cash drawer or box, which should now hold the original amount of money set aside for the fund. The cashier records the petty cash receipts in a journal entry.
This is a credit to the petty cash account, with debits to a variety of expenditure accounts, including the office supply account (depending upon what was purchased with the cash). The petty cash account balance should now be the same as it was when you started.
Because the cash in the petty cash box is constantly being paid out, the balance on the petty cash account is higher than the amount of cash actually in the petty cash box. However, the difference is so tiny that it has no bearing on the financial accounts' findings. As a result, the discrepancy is only balanced when the petty cash box needs to be refilled.
How to Create Petty Cash Accounts?
Controlling petty cash funds is usually the responsibility of one employee. The petty cash custodian is the title given to this individual. All petty cash expenses shall be tracked and documented by the custodian. By delegating this obligation to a single custodian, you will maintain internal control over the funds.
Cashing a check, normally ranging from $100 to $500 depending on the size of your firm, can be used to set up your petty cash float the maximum, a fixed amount of cash on hand. Petty cash funds for each department are common in larger firms.
The amount you set aside for your petty cash fund should be enough to cover little expenses for at least one month. In the asset part of your financial reports, you'll also need to create a petty cash account.
The custodian is responsible for maintaining petty cash funds in a secure location, such as a lockable box, where they can only be accessed when necessary. Despite its tiny size, the petty cash account requires supervision.
When the custodian disburses money from the petty cash fund, the employee receiving the funds signs a petty cash receipt. The amount disbursed and what the fund is being used for will also be shown on the receipt.
Establishing Internal Controls for Petty Cash Funds
You must establish clear and explicit conditions when setting up a petty cash system for your firm so that monies are not misused. It's a good idea to spell out what petty cash can be used for; the policy should be written down and available for your management team and staff to check.
Typically, the number of people who have access to petty cash funds should be limited.
You don't have to distribute petty cash to every employee, and your petty cash custodian should be the only one who can disperse it. The custodian should determine if each expense is reasonable in light of your company's petty cash policy.
Make sure the petty cash fund has a decent quantity of money in it and that it is sufficient to suit your company's needs. When the fund is running low, make sure the custodian replenishes it - making sure, of course, that you know where and how the money was spent.
Petty Cash Fund Management
Even though the expenses that pass through your petty cash funds are minor, they must be well managed. All tax-deductible expenses are captured when you track all of your petty cash expenses as part of your bookkeeping system.
The process of managing your petty cash funds begins the moment the first check is cashed to create the petty cash float. For example, if you set up a $100 petty cash fund, your petty cash account book entry will reflect a $100 debit from your petty cash fund and a $100 credit from your bank account.
Every time your custodian disburses money, he or she will fill out a receipt, ensuring that the total of the money and receipts in the petty cash box equals the petty cash fund's beginning amount.
When the petty cash fund's balance drops too low to be useful, the custodian should count and summarise the receipts, then exchange them for a new check written payable to cash equal to the total of the receipts. The monies will be added to petty cash after the check is paid, restoring the original level.
If the custodian determines that the petty cash fund is insufficient—for example, if the fund must be replenished every few days—the float may be increased. The petty cash accounts would then be updated to reflect this.
The custodian, on the other side, may determine that the fund amount is excessive. The surplus petty cash should be removed from the fund and put in the company bank account in this scenario.
Taxes and Petty Cash
If maintaining a $100 fund seems like a lot of labour, there are valid reasons for it. Typically, all or most of your petty cash transactions will be for company purposes, which means they will be tax-deductible.
That is why it is critical to keep track of all expenses. You won't be able to deduct them from your business costs for a purchase if you don't document them completely. You can read IRS Publication 583 for additional information on the petty cash and recordkeeping requirements.
Small and medium-sized businesses benefit from petty cash because it maintains money on hand for unexpected needs. Keeping track of those expenses helps you budget for future ones, and while they may be minor, they add up.
Using petty cash can save time if all disbursements are meticulously recorded by the petty cash custodian and the money is supplied on a regular basis.
To manage your costs and expenses you can use many available online accounting software.
How can Deskera Help You?
Deskera Books is an online accounting, invoicing, and inventory management software that is designed to make your life easy. A one-stop solution, it caters to all your business needs, from creating invoices and tracking expenses to viewing all your financial documents whenever you need them.
· There are many different types of petty cash funds that can be used to pay for things like office supplies and employee reimbursements, among other things.
· When sending a check or utilising a company credit card is difficult or impossible, a little amount of petty cash comes in handy. According to the amount of money that a company considers petty, can range from $100 to $500.
· Many companies have strict internal procedures in place to handle the fund's administration. Only expenses directly related to a company's legal activities or operations can be approved by a small number of people who are normally given that authority.
· Even when a petty cash fund is used, the transactions are still recorded on the financial accounts. No accounting journal entries are created when petty cash purchases are made.
· In many circumstances, cash remains the quickest, simplest, and most convenient method of payment. It's ideal for covering tiny unforeseen costs, such as a tip for the child bringing pizzas to the lunch meeting or cab fare home for staff who work late. It eliminates the trouble of reimbursing employees or requiring them to pay for work-related expenses out of pocket.
· Growth necessitates financial resources. One of the most prevalent corporate goals is expansion, but it is not without risk. It can also be very expensive. It's conceivable that you'll require 50 percent or perhaps 100 percent more money than you estimate.
· Controlling petty cash funds is usually the responsibility of one employee. The petty cash custodian is the title given to this individual. All petty cash expenses shall be tracked and documented by the custodian. By delegating this obligation to a single custodian, you will maintain internal control over the funds.
· The total of all revenues is determined at this point to ensure that it matches the funds disbursed from the petty cash drawer. If additional funds are required, the cashier issues a fresh check to replenish the petty cash drawer and accepts the receipts from the purchases that depleted the cash.
· The process of managing your petty cash funds begins the moment the first check is cashed to create the petty cash float. For example, if you set up a $100 petty cash fund, your petty cash account book entry will reflect a $100 debit from your petty cash fund and a $100 credit from your bank account.