What is Petty Cash?


Petty Cash is a small amount of funds set aside to cover incidental expenses such as postage, office supplies, or employee reimbursements. Petty Cash is an Asset. The purpose of Petty Cash is to cover small expenses rather than writing a check for those expenses.

Accounting for Petty Cash

When a Petty Cash fund is originally set up, the following journal entry is recorded:

Petty Cash100
Cash100
Journal Entry to record setting up a Petty Cash account.

The initial set up of Petty Cash is one of only two occasions when the amount in Petty Cash changes. The Petty Cash account will only be changed if the Petty Cash account is increased or decreased. For example, a company determines that the original amount is not sufficient to cover the small expenses of the business. The needed amount is $150. In that case, the Petty Cash account will be increased by $50 using the following journal entry:

Petty Cash50
Cash50
Journal Entry to record increasing a Petty Cash account.

The balance in the Petty Cash account is now $150 [$100 + $50].

If the company decided that the original amount of $100 was too high, and the desired amount was $50, the following journal entry would be made:

Cash50
Petty Cash50
Journal Entry to record reducing a Petty Cash account.

The balance in the Petty Cash account is now $50 [$100 – $50].

The Petty Cash account balance will only change in those three situations: setup, increase, or decrease. All other entries to record Petty Cash are done using expense accounts and the cash account.

How to Keep Track of Petty Cash

Although the small amount usually kept in a Petty Cash account may seem insignificant, tracking activity in Petty Cash is an important internal control function for the following reasons:

  1. Transactions in Petty Cash are expenses and are not recorded until Petty Cash is reconciled.
  2. A lack of internal controls for Petty Cash can lead to employee theft, or false accusations of employee theft.
  3. Lax management of Petty Cash sends a signal that good asset controls are not in place.

Best practices for managing Petty Cash include the following processes:

  1. An appropriate amount of Petty Cash is determined. Generally, this would be a small amount and only what is needed.
  2. A method to secure the cash is determined. Will it be kept in a locked box? A locked cabinet?
  3. Determine who will be the responsible party for overseeing Petty Cash? Who has access? Who will reconcile the account each month?
  4. What are the appropriate uses of the Petty Cash account–postage, fuel, employee reimbursement for small purchases?
  5. At all times the Petty Cash account will have either cash or cash and receipts that add up to the Petty Cash amount. For example, $50 in cash or $35 in cash and $15 in receipts for a total of $50.
  6. At the end of each month, the Petty Cash account is reconciled as part of the usual month-end close process.
  7. Receipts are categorized by expense category, and cash is counted. The total amount of cash + receipts should equal the amount of the Petty Cash fund.
  8. Petty Cash expenses can be entered one of two ways. Either as a journal entry or as part of the check cut to replenish Petty Cash.
  9. A check is made out for the amount of cash needed to bring the cash in the account back to the full amount of the Petty Cash account.

Examples of Petty Cash Transactions

The following examples use both accounting class transactions (journal entries) and real-world methods of setting up and tracking Petty Cash.

Setting Up a Petty Cash Account

Terrance Inc. determines that the accounting department needs a Petty Cash account for incidental expenses. The amount the company has determined is appropriate is $100. To set up the Petty Cash account, the following journal entry is made:

Petty Cash100
Cash100
Journal Entry to set up Petty Cash account.

This is the method used for accounting classes. Most companies will do this in real life by doing the following:

When using accounting software, this entry can be done as a check. Using the “Write Checks” window, a check is created to move the funds from Cash to Petty Cash. The payee is Cash. The account line is Petty Cash. The amount is $100. When a check is written to “Cash” as the payee, always make sure to include a reference in the memo line to state the purpose of the check. In this case, “to set up Petty Cash account.”

On the Balance Sheet, we now see that the Cash account is decreased by $100 and the Petty Cash account is increased by $100. All we’ve done is shifted funds from our main cash account into a special fund cash account.

Reconciling a Petty Cash Account

At the end of the first month, during month-end close, the accountant counts the cash and adds up the receipts. The amount should equal $100. Let’s look at a couple of examples.

Example 1: Cash and receipts in the Petty Cash box are:

Cash 42.83
Gas 26.35
Postage 11.25
Supplies 19.57
Total100.00
Example of Petty Cash Expenses

Using the journal entry method of recording Petty Cash expenses and replenishment of cash, the following journal entry is made:

Gas Expense26.35
Postage Expense11.25
Supplies Expense19.57
Cash57.17
Journal Entry to record Petty Cash expenses.

Note that the account being used to replenish Petty Cash is the main cash account. The Petty Cash account is only used for setting up the Petty Cash account or increasing/decreasing the amount set aside for Petty Cash.

When using the “write check” method in accounting software, the payee for the check will be Cash and the amount will be $57.17. In the line items at the bottom of the check, the same expense accounts used in the journal entry above will be entered. This increases the expenses, and provides the check to replenish the account.

In both methods the result will be the same: Expenses are entered and the resulting replenishment of cash will bring the Petty Cash account back to $100 cash. [$42.83 remaining cash + $57.17 replenishment]

Example 2: Cash and receipts in the Petty Cash box are:

Cash 43.83
Gas 26.35
Postage 11.25
Supplies 19.57
Total101.00
Example of Petty Cash Expenses

In this example, the total amount of cash and receipts in Petty Cash is $101. The cash amount is over what it should be. Usually this means an error was made in making change from the Petty Cash account or if incorrect change was made when supplies or postage was purchased.

When this happens, an account called Cash Over and Short is used to track the difference. When the cash is over, the Cash Over and Short account acts like a revenue account. When the cash is short, the Cash Over and Short account acts like an expense account. For more information about how the Cash Over and Short account is used, read this article: What is Cash Over and Short? – Accounting How To

Using the journal entry method of recording Petty Cash expenses and replenishment of cash, the following journal entry is made:

Gas Expense26.35
Postage Expense11.25
Supplies Expense19.57
Cash Over/Short 1.00
Cash56.17
Journal Entry to record Petty Cash expenses.

Note that the account being used to replenish Petty Cash is the main cash account. The Petty Cash account is only used for setting up the Petty Cash account or increasing/decreasing the amount set aside for Petty Cash.

When using the “write check” method in accounting software, the payee for the check will be Cash and the amount will be $56.17. In the line items at the bottom of the check, the same expense accounts used in the journal entry above will be entered and the Cash Over and Short line will be added. This increases the expenses, and provides the check to replenish the account.

In both methods the result will be the same: Expenses are entered and the resulting replenishment of cash will bring the Petty Cash account back to $100 cash. [$43.83 remaining cash + $56.17 replenishment]

For more examples and some stories about how Petty Cash can lead to fraud, watch this video:

Video explaining how Petty Cash works and how it can lead to fraud and embezzlement.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 11 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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