Petty Cash Journal Entry Explained: What is Petty Cash and How to Record It?

Cash is one of the most crucial resources for companies. Managing this resource is highly critical for long-term success. In most cases, companies have dedicated departments to handle their cash resources properly.

Usually, it falls into the same function that manages working capital needs. Most companies utilize bank accounts to manage their cash resources. However, they still need to hold some cash on-premises.

Companies hold cash on-premises for daily needs. However, managing this function is more complex than using banks. With bank accounts, companies can handle their cash more efficiently.

However, when they hold those amounts on-premises, it because more susceptible to mismanagement. Companies can tackle that issue by establishing a system to manage those amounts. This system falls under petty cash.

What is the Petty Cash?

Petty cash is the system companies use to manage insignificant amounts of cash at premises. Often referred to as cash in hand, this cash is highly susceptible to fraud or mismanagement.

Therefore, the petty cash system allows companies to handle those amounts. Petty cash refers to minor cash amounts that companies hold to pay for small or incidental expenses.

Companies hold petty cash at premises to manage daily expenses. These expenses may range in a specific range. Usually, this range comes from within the company.

However, other regulations may also dictate if companies can use petty cash to settle a transaction. For example, some countries require companies to use bank accounts for transactions above a specific amount.

Companies use the petty cash system to track expenses paid from the cash in hand account. On top of that, it also records the amounts received into that account.

Usually, the sources of receipts in this account involve the company’s bank account or customer payments. Companies perform periodic reconciliations to ensure accuracy. This process falls within the internal controls and petty cash system for companies.

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Companies may manage an overall petty cash system. However, some companies also delegate it to every department.

In those cases, each function will handle its own petty cash. At the end of every accounting period, the company must reconcile those balances. Usually, this approach to petty cash requires more work. However, it also allows companies to give every department more control over their expenses.

Overall, petty cash refers to cash held at premises to pay for insignificant daily expenses when they arise. Companies maintain a system for this cash.

While most companies have adopted other systems to reimburse minor amounts, they still use petty cash. Since cash is a highly critical resource, it is also crucial to manage it effectively. On top of that, companies must also account for petty properly.

What is the accounting treatment for Petty Cash?

The accounting for petty cash occurs through the “cash in hand” account. As mentioned above, it only holds insignificant monetary amounts held at premises for specific uses.

Usually, the petty cash system within a company includes several transactions. These transactions involve spending or receiving cash from the petty cash balance. The accounting for each of these transactions may differ.

However, accounting for petty cash will always involve the cash in hand account. Usually, the debit or credit side of the journal entries for a transaction will use that account.

On the other hand, the other side will be the area where a company receives or spends money. Beyond these, the petty cash account does not have any additional accounting treatments.

When a company receives cash to the petty cash account, it must increase that balance. In this case, the company must identify the source of that receipt.

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Usually, it comes from a bank account. In some cases, customers will also pay companies in petty cash. Similarly, companies may also receive reimbursements for petty cash amounts paid to specific parties. These are the most prevalent sources of receipts into the petty cash account.

On the other hand, spending from the petty cash account will also have specific sources. Usually, these include expenses. For example, paying for repairs, maintenance, food, and drinks, etc.

On top of that, some companies may also offer temporary loans to employees for small amounts. This transaction also involves spending from the petty cash account. The accounting treatment will be the same as when recording expenses.

When companies pay amounts from the petty cash account, they will use it as a credit entry. If the transaction involves a receipt into this account, it will be a debit entry.

Usually, these are the only two types of transactions occurring within this account. Some one-off entries may also go into the petty cash. However, those transactions do not constitute a regular occurrence for companies.

What are the journal entries for the Petty Cash?

The journal entries for the petty cash are straightforward. Usually, it involves recording receipts or spending from the account.

The journal entries for each type of transaction will differ. However, both will include recording the amounts into the petty cash account.

In most cases, companies term this account as the “cash in hand” account. Other names may include “cash” or “petty cash” accounts.

When a company receives money in petty cash, it must increase the balance. In this case, the journal entries will involve debiting that account.

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However, companies must also identify the source for that transaction. Usually, it includes reimbursing the petty cash balance through the bank account. The journal entries will be as follows.

DateParticularsDrCr
 Cash in handXXXX 
 Bank XXXX

Companies may also receive amounts of petty cash from other sources. For example, they may include accounts receivable receipts. In those cases, the journal entries will be as below.

DateParticularsDrCr
 Cash in handXXXX 
 Accounts receivable XXXX

On the other hand, companies will also spend money from petty cash accounts. In that case, the journal entries will involve this account on the credit side. The debit side will include the specific area where companies spend that money. Usually, it consists of paying for expenses. Therefore, the journal entries for petty cash, in that case, will be as follows.

DateParticularsDrCr
 ExpenseXXXX 
 Cash in hand XXXX

If companies spend the petty cash in other areas, the debit side for the double-entry will change. However, the petty cash account will stay the same.

Example

A company, ABC Co., maintains a petty cash system. The company holds $5,000 in the account to pay for expenses and other similar activities.

Subsequently, ABC Co. deposits $1,000 into the account. The company uses its bank account to withdraw this money into the petty cash account. The journal entries for this transaction will be as below.

DateParticularsDrCr
 Cash in hand$1,000 
 Bank $1,000

ABC Co. also pays for various expenses using the petty cash account. The total of these payments was $3,000. Therefore, the journal entries for expenses through petty cash will be as follows.

DateParticularsDrCr
 Expenses$3,000 
 Cash in hand $3,000

Conclusion

Petty cash is a system where companies keep cash on hand to pay daily expenses. However, companies use this account for insignificant amounts only.

Usually, they top up this account regularly through various sources. The journal entries for petty cash consider those areas. These include receiving money or paying for expenses.

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