There needs to be proof of what petty cash is used for. This serves two reasons: preventing fraud, and helping the organization accurately list all their expenses.
Simplest method – single use petty cash account
Activist group A has a physical office located in an urban area with only metered on-street parking nearby. A stash of quarters is kept in a drawer to give to visitors to feed the meters. The cash is kept in quarters, which helps ensure it is primarily used for its single purpose. There is no possibility of obtaining a reciept from the purchase – the older on-street parking meters do not give reciepts. In this case, there is no need to log or track “what things” the money is used for. And the “when” question is defined by the length of time between buying one roll of quarters and the next.
The actually bookkeeping entry for this type of petty cash is very easy. When the cash is drawn from the bank to fund the petty cash account, the total amount used is listed as “visitor parking” or “parking” expense. There is no need to ever list it as a temporary “petty cash” account – it is only used for one purpose.
Traditional method – tracking log
Small org keeps a petty cash of around $50 in their office to repay staff when they make small purchases with their own money for items not normally bought through vendor accounts, such as cards, dish soap, or holiday decorations.
Traditional petty cash logs are specially printed books that have little tear away sheets and a carbon copy. They are used in the following manner:
Employee goes to Petty Cash Czar and states they need to buy a going away card and some flowers for a departing staffer. PC Czar takes out the log and notes the date, name of employee borrowing the money, the reason, and that they are first giving them $20. Employee *signs* the slip, agreeing they received $20 in cash.
Employee returns with flowers, card, two receipts and the change from the $20. PC Czar notes the amounts paid and the change returned. This sum totals $20. Czar signs the slip all is OK.
Czar then tears out the slip, and *staples it* to the two receipts. The receipts and change go back into the box.
When the bills processor opens up the petty cash box, there will be a total of $50 combined of both actual cash and receipts.
How to record Petty Cash in your accounting system
At the end of a time period (or when the cash is used up), the receipts are taken out of the box, added up, and defined by the company’s accounts. For example, rare is the company with an expense account for “Flowers”. So the money spent on the flowers could be listed under “gifts”, “staff meals & entertainment” or “miscellaneous”.
Say the box contained $7.50 cash and $42.50 in receipts. The $42.50 would be sorted into different expense accounts and entered into the accounting system.
One accounting method is to list petty cash as a “bank account” or cash account in the accounting system. Then a journal entry is used to list the expenses against this cash account. To issue a check to replenish the petty cash, a “transfer” is done between the two “bank accounts” using an ATM withdrawal or a check made out to cash.
Another method to record petty cash expenses is to handle each new cash disbursement as the expense categories from the old disbursement. To start this method, the initial petty cash check is written to “miscellaneous” expenses. Then each re-issue of cash is for the exact amount of the collected receipts in the box. The new payout is attributed to the specific expense accounts for the actual expenses that recently occurred.