How To Do Petty Cash Accounting & Recording in 6 Steps

Having a petty cash fund speeds up reimbursements and is an important best practice in cash management. It enables your employees to perform quick errands without using personal money. You have to craft a clear petty cash policy as it sets out the purpose and use of the petty cash fund.

List Allowable Expenses

With a petty cash fund in place, you can pay for small expenses like postage stamps, office supplies, office food and drinks, fuel expenses, parking tickets, and other unpredictable expenses. Any expense that’s too small to write a check for can be paid with cash from the petty cash fund. Note that it’s a good idea to set a maximum dollar amount for allowable expenses.

Delegate a Petty Cash Custodian

The petty cash custodian is the person accountable for the petty cash fund. They’ll be in charge of handling and disbursing petty cash and ensuring that the petty cash fund is used for its intended purpose. They’re also responsible for the safekeeping of the physical cash and possess the key to the lockbox where the cash and receipts are kept.

In your petty cash policy document, include the name and signature of the custodian so that there’s an official transfer of accountability for the petty cash.

Set the Maximum Fund & Reimbursement Threshold

Most companies maintain a petty cash fund balance of anywhere from $100 to $500, but the amount will depend on your petty cash needs. To illustrate further, assume that we have a fund balance of $500. Our policy states that petty cash reimbursements shouldn’t exceed 10% of the fund balance. This means that expenses above $50 cannot be charged to petty cash. However, we can also specify that certain expenses are always chargeable to petty cash, even if they’re above $50.

The petty cash custodian will keep all petty cash items inside a lockbox. Only the custodian can access the lockbox—and it mustn’t be left opened and unattended. Inside the box, you’ll find currencies and receipts.

Let’s look at a sample: To set up the petty cash fund for $300 in the books initially, you or the bookkeeper need to make the following journal entry:

A petty cash fund is a current asset account that should appear on your balance alongside other cash accounts, such as checking and savings accounts. After recording the journal entry, the custodian should receive $300 cash or check from the owner or cashier.

To reimburse expenses, require a receipt from the employee and then provide them with the exact amount of cash and coins from the lockbox. Then, place the receipt in the lockbox and record the expense in the petty cash log by entering the date, payee, description, reference number, and amount.

Here’s an example of a petty cash log, followed by the fields you need to complete:

• Date: Indicate the date when reimbursement was made
• Payee: Write the name of the employee who asked for reimbursement
• Description/Purpose: Explain the expense briefly; for example, you can write, “Fuel expense for delivery trucks” or “Postage stamp cost”
• Reference Number: Enter the official receipt number. If there’s none, you may leave it blank
• Amount: Indicate the amount reimbursed

The bottom portion of the petty cash log won’t be completed until the cash in the lockbox needs to be replenished. There’s no need to make journal entries when expenses are reimbursed from cash in the lockbox.

Petty cash must be reconciled when the cash is replenished. However, the petty cash custodian may perform weekly or daily reconciliation to keep track of the fund balance. Using a cash count sheet can be used to document the cash count, but it’s optional.

The reconciliation is straightforward—every time you take cash out of the box, you replace the cash with a receipt for the same amount. Therefore, all receipts plus remaining cash must be equal to the original amount placed in petty cash.

Every month, or as cash is needed, the custodian should summarize the petty cash log by expense account and record a journal entry debiting each expense and crediting petty cash.

Enter the petty cash fund balance as the beginning balance. Then, get the total of the Amount column to determine total petty cash expenses. That’s also the amount you’ll ask for as reimbursement. The ending balance is the difference between the beginning balance and the total petty cash expenses. The currencies inside the lockbox should be equal to the ending balance.

After the owner or bookkeeper records all expenses in the books, cash must be taken from the checking account to replenish the petty cash box. Record the transfer of cash by debiting Petty Cash and crediting Checking Account.

Let’s assume the following information from the petty cash transactions of Paul’s Plumbing:

• January 1: The petty cash fund is set to $500 with Heather Smith as the custodian.
• January 3: The custodian reimbursed Deborah Wood $41 for fuel expenses. The receipt number is 22312.
• January 9: Richard Roe paid $49 for the fuel of the delivery truck. Heather Smith refunded the amount to him in exchange for the receipt with number 23330.
• January 14: Rafal Bolinski purchased postage stamps for $38.
• January 16: Heather Smith purchased office supplies from Office Depot. She took $187 out of the lockbox. The receipt number is 3397452.

QuickBooks Online uses a petty cash register format that’s easy to use and maintain. If you plan to have the custodian use QuickBooks Online, there are four easy steps to follow:

Step 1: Create a Petty Cash Account

Click Accounting on the left-hand side menu and then choose Chart of Accounts.

Accessing Chart of Accounts on QBO

Accessing Chart of Accounts on QuickBooks Online

In the upper right portion of the window, click the green New button to create a petty cash account.

Creating a New Account

A sidebar window where you can create a new account will appear. Fill out the form and don’t enter a beginning balance. Click the green Save button once you’re done.

Creating a Petty Cash Account

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Step 2: Establish the Petty Cash Fund Balance

Go back to the Chart of Accounts screen and look for Petty Cash Account. On the far right of the column, click View Register to arrive at the petty cash register.

Accessing the Petty Cash Register

Once the register appears, click the drop-down arrow and choose Deposit.

Petty Cash Register

1. Payee: The payee is the petty cash custodian. In our sample above, the petty cash custodian is Heather Smith.
2. Account: Select the Checking Account as the source of petty cash.
3. Memo: If you want to add explanations to the entry, you may insert them in the Memo field. In our sample, we placed “Petty Cash Custodian” to make it clear that we’re depositing cash to the custodian.
4. Amount Deposited: Enter the petty cash fund balance based on the policy.

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Step 3: Record Petty Cash Expenses

When it’s time to record expenses, such as the end of the month, go back to the Petty Cash Register and click Add Expense. You need to create an expense entry for each receipt that you’re recording from the lockbox.

Let’s record the transactions one-by-one on QuickBooks Online.

• January 3: The custodian reimbursed Deborah Wood $41 for fuel expenses. The receipt number is 22312.

Based on the information above, fill out the fields to record the expense. Repeat this process for all succeeding transactions.

After we click the green Save button, the first entry should appear like in the image below. Notice that the ending balance of Petty Cash became $459.

• January 9: Richard Roe paid $49 for the fuel of the delivery truck. Heather Smith refunded the amount to him in exchange for the receipt with receipt number 23330.

• January 14: Rafal Bolinski purchased postage stamps for $38.

• January 16: Heather Smith purchased office supplies from Office Depot. She took $187 out of the lockbox. The receipt number is 3397452.

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Step 4: Replenish Petty Cash Account

After entering all expenses, it’s time to record the replenishment. First, click Add Deposit then fill out all the required information. Currently, we have $185 in our petty cash account. Heather needs a $315 reimbursement to bring the petty cash balance back to $500.

Recording Petty Cash Replenishment

Once you hit the green Save button, the petty cash account’s balance should be $500 again.

Petty Cash Balance after Replenishment

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