Tracking and recording petty cash expenditures

Stan Synder Stan Snyder, CPA and expert bean counter

Every business makes small cash expenditures that are difficult to keep track of: Employees forget to bring back receipts, cash funds tend to disappear, and summarizing multiple expenditures is a time-consuming and tedious task.

Why worry about petty cash?

A financial statement that has numerous payments coded to "miscellaneous expense" or to a "petty cash" asset account is misleading at best or simply incorrect at worst. The goal of using a petty cash fund is to record small cash expenditures as expenses, in the correct time period, while tracking vulnerable cash balances. The most common mistake I see as a consultant is checks that are coded to the Petty cash account, where the account is set up as an asset account with no detail recorded about actual expenses. This overstates assets and understates expenses. It also makes me wonder about more important issues such as:

  • Who has control over the cash box?
  • Who has access to it?
  • What expenses should have been recorded?
  • Where is the cash going?

This article explains three different methods for using a Petty cash account to record small business expenditures:

  • Traditional method using a cash box
  • Computer method using a cash box
  • Computer method without a cash box

Traditional method using a cash box

The traditional method of recording petty cash is based on a cash box. A fund is established in an amount sufficient to pay all of the miscellaneous cash requirements for a month. Let's say that we have determined that $300 will be sufficient to pay all of the miscellaneous expenditures in a typical month.

We cut a check, payable to Petty Cash (a vendor), and coded to the Petty cash account — an asset account. This is the only time an entry will be made to the Petty cash account; all future checks for petty cash will be coded to expense accounts. We cash the check at the bank, getting sufficient change to be able to make change for any small expenditure. The money is placed in a cash box, where it can be locked up and kept secure. When an expenditure is made, a receipt is placed in the cash box to account for the cash paid out.

The total of the cash in the box plus the receipts always totals $300. If an employee needs a cash advance to run an errand or pick up supplies, they sign a chit for the amount withdrawn. The cash in the cash box plus receipts and chits always equals $300, the fund balance. When the employee returns with a receipt and change, the chit is replaced with the receipt and change.

In this way, the amount in the petty cash fund always balances to $300. Periodically, preferably once per month, the receipts are totaled and summarized by expense account and a check is cut to replenish the petty cash fund. The amount of the check is the amount necessary to bring the fund balance back to $300, usually the total of the receipts. This check is coded to each expense account, in a split transaction, and not to the Petty cash account.

While the payee on the check is Petty Cash (a vendor), the amount is coded to expense accounts based on the summary of receipts. The receipts are then stamped PAID to prevent their re-use. In reimbursing the petty cash fund monthly, all miscellaneous cash expenditures are recorded in the proper month. Any shortage is coded to the Cash over and short account, recording for all to see exactly when and in what amount any shortages occurred.

Computer method using a cash box

The hardest part of the traditional method, other than keeping the fund in balance, is summarizing and categorizing the individual receipts. The next method uses the power of the computer's database program to record, summarize, and categorize expenditures with each transaction.

This method also uses a cash box.

A fund is established in an amount sufficient to pay all of the miscellaneous cash requirements for a month; once again, we have determined that $300 will be sufficient to pay all of the miscellaneous expenditures in a typical month. A check is cut, payable to Petty Cash (a vendor), and coded to the Petty cash account — an asset account.

Unlike the traditional method, all future checks for petty cash will also be coded to the Petty cash account. The check is cashed, getting sufficient change to be able to make change for any small expenditure. The money is placed in a cash box, where it can be locked up and kept secure.

When an expenditure is made, a receipt is entered in the Petty cash account register as a disbursement. The total of the cash in the cash box now matches the amount in the computer's Petty cash account register.

If an employee needs a cash advance to run an errand or pick up supplies, they sign a chit for the amount withdrawn. The cash in the cash box plus chits will vary, but it always totals the register balance. When the employee returns with a receipt and change, the chit is torn up, the receipt is entered in the register and the change is returned to the cash box. In this way, the amount in the petty cash fund always balances to the computer's register; and expenses are recorded in real time, as they happen.

To replenish the petty cash fund, calculate the difference between the normal fund balance — in this case, $300 — and the balance in the cash box. Cut a check payable to Petty Cash, and code the check to the Petty cash account. This will restore the fund balance to $300 in the register and in the cash box. Any shortage in the cash box — a difference between the amount in the register and the amount in the cash box — would be coded to the Cash over and short expense account, documenting when and in what amount shortages occurred.

Computer method without a cash box

Often, an owner or employee will make expenditures out of his or her own personal funds, and no petty cash fund is established. If these expenditures are infrequent, a reimbursement check, made directly to the person making the expenditure, may be all that is required. This check should be coded directly to an expense account, and will record the expense as it is paid.

However, if numerous expenditures are incurred, it may be more efficient to use a petty cash account to track expenses as they happen, and record a single check to reimburse multiple expenditures. In this case, the petty cash account will have a negative balance as each expenditure is recorded. The Petty cash account is in effect a liability until it is reimbursed, when it will return to a zero balance.

This method has the added advantage that there will be no cash shortages — only expenditures that are recorded will be reimbursed. The Petty cash account is used to track and record expenditures as they happen. In addition, it shows the exact amount to be reimbursed. When a reimbursement check is cut, it is coded to the Petty cash account.

 Note   The computer method without a cash box assumes that if the owner is making the expenditure, they expect to be repaid; often the owner of the business will pay miscellaneous expenses out of a personal account but does not expect to be repaid. These types of expenditures may be recorded directly in the owner's capital account, as a contribution to equity.

An efficient method of recording small disbursements

Any of the above methods will work well with your computer program. The one that you pick will depend on the requirements of your business. The goal of using a petty cash fund is to pay numerous small expenditures efficiently. These techniques will record expenses in the proper time period, track the petty cash fund balance, and allow you to minimize unexplained cash shortages.


About the author

Stan Snyder is a certified public accountant with over 25 years experience dealing with the accounting and computer problems that small business owners face. He teaches computerized accounting classes at Colorado Mountain College, and regularly consults with small business owners using accounting software of all types. If you have questions about this topic or another accounting topic, send Stan some feedback by responding to the question below "Was this article helpful?" Stan may use your questions or topic ideas in an upcoming column.

 
 
Applies to:
Accounting 2008