Petty cash refers to a currency fund companies use for small purchases.
The petty cash fund is a convenient way for companies to account for incidental expenditures.
Because the petty cash fund can be highly susceptible to theft, companies generally designate an employee to oversee the fund. The employee responsible for the petty cash fund is known as the petty cash custodian. The petty cash custodian disburses currency from the petty cash fund and ensures that the balance of the fund equals the remaining currency plus receipts for expenditures.
The petty cash fund is initially set up by transferring currency from the main cash account to the petty cash account. This journal entry involves debiting the petty cash account and crediting the cash account. Expenditures from the fund are not recognized directly in the petty cash account. Rather, the petty cash fund is replenished by debiting the relevant expense accounts and crediting cash. This is done at periodic intervals to ensure that the fund is replenished and that the fund expenditures are accounted for.
For example, suppose a company maintains a $2,000 petty cash fund. The company replenishes the petty cash fund at the end of each month. In the month of January, the company disbursed $560 for incidental expenses. What are the relevant journal entries at the end of January?
On January 31, the company would allocate the $560 via debits to the relevant expense accounts. The offsetting transaction involves a credit to cash for $560. This transaction ‘transfers’ the $560 to the petty cash fund and ensures that the petty cash fund contains $2,000 of currency at the start of February.
