How to Do Petty Cash Accounting & Recording in 4 Steps

Petty cash accounting is a way to track the money coming in and going out of your business. It’s also an easy way to stay on top of your finances. This article will show you how to set up your petty cash accounting system, record transactions, and log expenses for small businesses.

A petty cash fund is a small sum of money, typically less than $500, set aside to meet miscellaneous expenses. Establishing a petty cash policy, setting up a petty cash log, generating journal entries, and reconciling the petty cash account is all part of petty cash accounting. Accounting may be done manually or with the help of accounting software and expenditure cards for employees.

1. Create a petty cash policy and procedures manual.

The first step is to record and explain your petty cash processes to all of your workers.

The following is important information to include in your petty cash policy and procedures:

• Petty cash should be managed by one individual, known as the petty cash custodian. This should be someone you have confidence in to follow the petty cash processes.
• Decide how much money you’ll retain in petty cash. A tiny office may just need a few hundred dollars, while a bigger office may require as much as $500.
• Inform workers that all petty cash transactions of $75 or more need a receipt; a receipt scanner app may help reduce the risk of misplaced receipts.
• The petty cash account should be balanced at least once a month or whenever it is refilled (whichever comes first).
• Petty cash transactions should be documented at least once a month, if not more often.

While creating a petty cash strategy won’t eradicate typical problems like theft, misappropriation of money, or misplaced receipts, it will assist to mitigate some of them. To further alleviate these problems, many company owners are abandoning cash in favor of prepaid business cards. For additional information, see our section on Petty Cash Accounting with Business Credit Cards.

2. Keep track of your petty cash.

A petty cash log is a comprehensive record of all deposits and withdrawals from the petty cash account, including the date of purchase, a short description of what was bought, the account to which the money should be charged, who received the funds, and who authorized the transaction. In general, one petty cash log template should be kept each month.

3. Keep track of petty cash in a journal entry.

At the very least once a month, if not more often, petty cash transactions should be documented. These purchases are recorded as a debit (increase) to an expenditure account and a credit (reduction) to the petty cash account, whether you use accounting software like QuickBooks or an Excel spreadsheet to keep track of your income and spending.

4. Make a reconciliation of the petty cash account.

Making ensuring you have a receipt for every petty cash transaction in your petty cash log and generating a journal entry to record it on the books is the first step in reconciling petty cash. While I think that a receipt should be required for all transactions (regardless of value), the IRS only needs receipts for purchases of $75 or more.

We’ll take a deeper look at the three main methods to record petty cash now that we’ve covered the essential stages of petty cash accounting: using accounting software like QuickBooks, using a spreadsheet like Excel, and importing from credit card transactions.

How to Set Up Petty Cash in QuickBooks

There are three stages to managing petty cash in QuickBooks. To keep track of all petty cash transactions, first create a petty cash account; next, record all petty cash disbursements; and finally, refill the petty cash account when it runs out.

The three main stages for handling petty cash in QuickBooks are as follows:

Create a petty cash account first.

In QuickBooks, a petty cash account is set up similarly to a bank account. To create a petty cash account, go to the Chart of Accounts and add a new account. Select Chart of Accounts from the main dashboard and then click the New option. The window that appears next will appear.

1. Select Bank as the account type for a petty cash account from the dropdown menu.
2. Select Cash on Hand as the Detail Type in this box, which is how petty cash accounts are classified in QuickBooks.
3. Name – You may enter Petty Cash as the account’s name in this box.
4. You may just copy and paste the account’s name into this box, or you can specify what this account is used for (e.g., office supplies, postage expense).
5. Balance — In this box, enter the amount you want to start the petty cash fund with.
6. As of – This is the day when the petty cash fund was created. The default value for this field is usually today’s date.

Step 2: Keep track of your petty cash.

Petty cash transactions may be recorded in QuickBooks in a few different ways. You may either scan the receipt using the mobile app, pick the expenditure category, and upload it to QuickBooks, or you can manually enter the transactions in the petty cash register. To do so, go to the Chart of Accounts and look for the petty cash account. When you choose View Register, the following window will appear:

1. Date — In this box, type the date of purchase.
2. Payee — From the dropdown menu, choose a payee. If the payee does not already exist, you can simply add them by choosing Add new on this page. For step-by-step instructions on how to add a new vendor in QuickBooks, see our video lesson on How to Set Up Vendors.
3. Cost Category — From the dropdown menu, choose the relevant expense category (e.g., office supplies, postage).
4. Reminder – In this area, provide a short description of the goods you bought.
5. Payment – In this box, enter the amount paid.

QuickBooks will record a debit (raise) to the expenditure account you chose in the expense category field and a credit (reduction) to the petty cash account after you save this transaction. On your profit and loss statement, this transaction will raise your expenditures while decreasing your assets on your balance sheet report.

Step 3: Replenish the Petty Cash Account

You must record a transfer between your company checking account and the petty cash account in QuickBooks to refill the petty cash account. To transfer money in QuickBooks, go to the banking menu and choose transfer funds, which will bring up the following window:

1. Select the account from which you’ll be withdrawing money from the menu; in most cases, this will be your company checking account.
2. Transfer Funds To – Select the Petty Cash account from the dropdown menu.
3. Enter the amount you wish to refill the fund within the Transfer Amount field.
4. Reminder – Fill up the blanks with a description.
5. Date – Choose when you want to refill the petty cash fund.

QuickBooks will record a debit (increase) to the Petty Cash Fund and a credit (reduction) to the Business Checking account after this transaction is saved. The balance sheet will be the sole financial report impacted since this transaction includes two asset accounts.

Using an Excel Spreadsheet to Track Petty Cash

Using an Excel spreadsheet to keep track of petty cash entails two main steps: maintaining a comprehensive diary of all petty cash deposits and withdrawals, and writing a journal entry at least once a month to record these transactions on your books.

Step 1: Set up a Petty Cash Log

The specifics of how the petty cash money was used should be recorded in a petty cash log. This information contains, but is not limited to, the following:

• Purchased date
• Amount
• What was bought and its description (e.g., postage, lunch for the office)
• The individual who was given the money
• An approver, usually the person in charge of the petty cash fund.

Step 2: Record Petty Cash Transactions in Journal Entries

You should record your petty cash transactions at least once a month, if not more often, in order to keep accurate financial records. For deposits to the petty cash fund, you’ll need to make a journal entry, and for withdrawals from the petty cash fund, you’ll need to make a journal entry.

The two kinds of journal entries you’ll need to record for petty cash deposits and withdrawals are listed below:

Deposits to the Petty Cash Fund are recorded in a journal entry.

To finance petty cash, you usually take money from your company checking account, as described in the preceding section. A debit (increase) to the petty cash fund and a credit (reduction) to the company checking account are the journal entries that must be documented.

Let’s say you wish to put $50 in a petty cash fund. You’d write the following entry in your journal:

The purpose of this transaction is to refill the petty cash account.

Withdrawals to the Petty Cash Fund are recorded in a journal entry.

Withdrawals from the petty cash fund will be considered expenditures. A debit (increase) to the relevant expenditure accounts and a credit (reduction) to petty cash are the journal entries that must be reported.

Consider the following scenario: We’ve spent $25 on mail, $35 on an office lunch, and $5 on office supplies. To document these purchases, we’ll make the following diary entry:

Explanation: Petty cash purchases during the month of May.

How to Account for Petty Cash Using Business Credit Cards

Business credit cards are a fantastic alternative to using a petty cash box and manually monitoring petty cash purchases using petty cash logs and Excel spreadsheets. Prepaid business credit cards let you set spending restrictions depending on the amount loaded on the card. You may also apply for a small business credit card, with your credit limit set by your company’s credit score.

Prepaid Credit Card for Business

Using prepaid company credit cards instead of petty cash is a much safer and more automated procedure. You can simply manage what kinds of expenditures the cards are used for by allocating them to people, departments, or even specific events like a corporate picnic, in addition to not having cash lying in a box that you have to worry about someone taking.

Additional advantages of utilizing a prepaid business credit card instead of petty cash include:

• The card’s limit is determined by the amount you put onto it.
• You will be able to view and download the details of each purchase (amount, date, and payee) to an Excel spreadsheet or your accounting software.
• Petty cash vouchers and logs are no longer required.
• Spending is turned on and off with a single click.

Unsecured Small Business Credit Card

Unsecured business credit cards, like prepaid business credit cards, have similar advantages: no need to keep track of petty cash logs and vouchers, and no risk of cash theft. However, as part of your corporate credit card policy, you must specify which types of purchases are acceptable and which are not.

Here are a few more reasons to use a company credit card instead of petty cash:

• The card’s limit is determined by your company’s credit score and payment history.
• Your company credit card statement, which you can download to Excel or your accounting software, has all of the information you need (e.g., amount, date, payee).
• There are no more petty cash vouchers or records to keep track of.
• Make notifications for when a single transaction exceeds a particular monetary level (for example, $100).

It’s simple to keep track of purchases made using corporate credit cards. If you use QuickBooks, you can simply link your company credit card account to the program and download all of your petty cash transactions in a matter of seconds! If you use Excel, you can simply download your purchases to an Excel spreadsheet.

Conclusion

Utilize forms and vouchers to keep track of your transactions if you intend to use petty cash for small company expenditures like postage and office supplies. When it comes time to balance your petty cash account, keeping meticulous records of cash expenses will come in handy.

Frequently Asked Questions

What is the journal entry for petty cash?

The journal entry for petty cash is a record of the money and change that has been deposited in the petty cash account.

How does petty cash work in accounting?

In accounting, petty cash refers to a small amount of money that is used for minor expenses. For example, if the company has a policy of only paying for lunch with petty cash, then each employee would be allotted $5 to spend on their own lunches.

How do you report petty cash?

You can report the petty cash by using the Report Petty Cash button on your account.