What Is Petty Cash? What Is a Credit Default Swap? Definition, Examples & How It Works

Recordkeeping and cash management for small cash

Petty cash is a small sum of cash kept on hand to pay for minor, incidental business expenses that are impractical to pay via check or electronic transfer. Petty cash definition and use: Petty cash description helps companies document, monitor, report spending while eliminating unnecessary bookkeeping on small expenditures

Petty cash definition and purpose

Petty cash is a convenience fund used to pay for everyday items: postage stamps, office supplies, minor repairs, parking fees or employee reimbursements related to small-business purchases. Petty cash funds are used to have quick access to cash, without having to process formal payments. A petty cash system must strike a balance between convenience and accountability: rules and documentation help prevent misuse of funds, while maintaining accurate accounting records.

Typical petty cash examples

Office supplies: pens and paper, sticky adhesive, small replacement parts.

Communications costs & courier's for urgent mailings

Cheap repairs or maintenance: change a light bulb, fix a chair.

Business use of an employee-approved expense chart for parking, tolls or business meals.

Other costs such as cleaning supplies or vendor gratuities.

Petty cash in practice: How it works step by step

Establish the fund — Management creates a set amount for petty cash (e.g. $200). This should align with regular requirements without being needless. The company makes an opening journal entry, debit Petty Cash and credit Cash (or Bank) for the amount funded.

Designate a custodian: A keeper guards the fund, ensures its security and hands out cash when legitimate requests are made. Petty Cash Box And Record Keeping The custodian controls petty cash box and records.

Request, approve and document: If someone needs petty cash, they either submit a request or fill out a petty cash voucher that contains details about the expense – the purpose of the money, amount needed, date and requester. Receipts are required whenever possible. Approval policies should outline what counts as an acceptable petty cash expense.

Cash disbursement and recording: The custodian disburses the cash, attaches the receipt to the voucher, and records an entry in a petty cash log. This keeps the physical cash down but piles up supportive documentation.

Reconcile and replace: on a low threshold, or at a set frequency, the custodian reconciles receipts against remaining cash. There is a request for replenishment to bring the petty cash back up to its authorized amount. The accounting team books the replenishment entry by debiting the relevant expense accounts and crediting Cash (or Bank) for the combined total of receipts.

Audit and review: Regular surprise checks and periodic reconciliations will help detect errors or misuse. Strong internal controls reduce the likelihood of loss.

Petty cash journal entries: examples in simple language

Funding the fund: Debit Petty Cash $200; Credit Cash/Bank $200

Purchase: You don’t have to record an entry for every item purchased if the organization waits until there is a need for it, marquees pub quiz. Instead, keep receipts and vouchers.

Fund replenishment: If receipts equal $165 and box has $35, to be submitted is $165. The entry will debit Expense accounts (as indicated on the receipts) by $165, and credit Cash/Bank $165 to bring the petty cash balance back up to $200.

Handling overages and shortages

When doing reconciliation, you may notice that the cash on hand disagrees with receipts. Where there is a shortage, the difference needs to be reported and recorded: Debit Cash Short and Over (or similar) for the shortfall in cash; credit Cash/Bank on replenishment. For an overage, credit Cash Short and Over and properly adjust records. The presence of discrepancies show weaknesses in controls and need to be looked at carefully.

Controls and best practices

• A reasonable fund limit — Ensure that the petty cash fund is small compared to total cash balances so as to minimize risk.
• Custodian: Establish custodian to limit access and assign responsibility for disbursements and records.
• Rest receipts and vouchers: All disbursements must be documented.
• Frequency of reconciliation: Monthly or after the fund reaches a certain trigger amount.
• Include details on eligible expenses: A well-defined petty cash policy helps prevent misuse or confusion.
• Implement dual approval for larger small purchases: Petty cash normally just covers little items, so having a second sign-off for anything above nominal value provides added protection.
• Keep the cash safe: A lock box or a safe helps minimize theft.

When to avoid petty cash

If a company has well-established electronic payment systems or very low volumes of petty cash transactions (for example, if the business is considered to follow a 100% no-cash policy), they may find that petty cash is redundant and not needed. For low-cost items at high-value organisations, small purchases can often be made through corporate, purchasing cards or central procurement processes, which offer better audit trails.

Advantages and disadvantages

Advantages:

• Swiftness: Instant cash access for urgent minor purchases.
• Simple: Little paperwork for low-payment goods
• Sondebo: Useful places or situations where payment does not go through electronically.

Disadvantages:

• Potential for abuse: Petty cash can lead to theft and inappropriate purchases if left uncontrolled.
• Burden of recordkeeping: Receipts must be stored, and reconciliations done to avoid issues in accounting.
• No oversight: Small, frequent transactions can mask improper spending patterns when reviews are infrequent.

Designing a petty cash policy

A treasury petty cash policy addresses these considerations: fund size, custodian responsibilities, documentation requirements (including valid receipt), appropriate approvals, document retention and reconciliation frequency and consequences of misuse. Provide training to staff on the policy and keep processes simple so that they are compliant.

Conclusion

When managed under strict guidelines and proper accounting, petty cash can continue to be a useful tool for managing small, routine expenses. Understanding what petty cash is, how to recognize and replenish it, and what controls to implement allows organizations to reap the benefits of convenience while maintaining financial integrity. In small amounts, with regular reconciliation and custody by the right people, petty cash can be a cost-effective solution for everyday business needs.