Petty Cash Book – Meaning, Types, Format, Examples, Operation

You know that feeling when you need to grab a few cash to pick up office supplies or grab some milky doughnuts for a team lunch? That’s where petty cash comes in. Running a business requires handling small, everyday purchases that don’t make sense to process through your full accounting system. Enter the handy petty cash book.

In this article, we’ll break down everything you need to know about petty cash books, from what they are to the different types and formats. You’ll learn step-by-step how to set one up for your office and find examples to follow. With a properly organized petty cash book, you’ll stay on top of every transaction and receipt.

What Is a Petty Cash Book?

A petty cash book is a book used to record minor cash expenses in a business. It allows the petty cash custodian to record small payments that are made in cash, usually less than a certain amount. This amount, known as the petty cash fund, is replenished periodically upon presentation of receipts and vouchers for the expenses incurred.

The petty cash book is a financial journal used to track small transactions including office supplies, postage, coffee/tea, meals, parking, cab fares, and other minor purchases. Keeping a petty cash book helps ensure transparency and accountability for these small business expenses. It provides a systematic record of how the petty cash fund is being used.

How Many Columns are in a Petty Cash Book?

A petty cash book typically has five main columns to record transactions: date, particulars, voucher number, receipt, and payment. The date column records the date of the transaction. The particulars column captures details about the transaction like what the expense was for. The voucher number column records the voucher number for the transaction.

The receipt column records the amount received, and the payment column records the amount paid out. By recording both receipts and payments, the petty cash book keeps a running balance of the petty cash fund. These columns allow you to see at a glance the sources and uses of petty cash so you can monitor the fund.

Types of Petty Cash Books

There are two types of Petty Cash book which are Columnar petty cash book, and Imprest petty cash book.

Columnar petty cash book

This book has money and date columns with a separate column for each head of expenditure. It records each cash payment in its respective column, allowing the cashier to have details of all payments made under a particular head.

Imprest petty cash book

In this system, a fixed amount is given to the petty cashier to meet petty expenses. The amount spent is periodically reimbursed to restore the Imprest amount. It records the receipts and payments in a chronological order. The cashier maintains a running balance which should tally with the Imprest amount.

What Transactions are Recorded in the Petty Cash Book?

Petty cash book is used to record small routine expenditure of the business and recurrent transactions, such as:

• Postage: The postage stamps purchased are recorded here.
• Conveyance: The expenses incurred on local conveyance like bus, train, taxi fares etc. are recorded.
• Stationery: The amount spent on purchasing pen, pencil, paper etc. are recorded.
• Loading and unloading: The amount paid for loading and unloading of goods is recorded.
• Wages: The wages paid to casual labour like hamalis, watchmen etc. for odd jobs are recorded.

Petty Cash Book Format

The petty cash book typically has the following format:

• Date: The date of the transaction.
• Particulars: A short description of the expense.
• Voucher No.: The serial number of the supporting voucher.
• Amount (Dr.): The amount of expense.
• Amount (Cr.): The amount reimbursed to the petty cashier to bring the balance to the float amount.
• Balance: The running balance of petty cash in hand after each transaction.

This format allows recording both the expenses as well as reimbursements to the petty cashier in the same book to keep track of the float amount. The balance column shows how much petty cash is in hand at any point in time.

What is Petty Cash?

A petty cash fund is a small amount of cash kept on hand for minor expenses in a business. For example, say you need to reimburse an employee for a parking fee or taxi fare related to a work trip. Rather than cutting a check for a few naira, you can pay them from the petty cash fund. Petty cash allows for quick payments of small incidental expenses. At the end of each period, the fund custodian provides receipts and invoices to account for the expenses and replenishes the fund back to its original amount.

How to Prepare a Petty Cash?

Once the petty cash fund is authorized, you need to set it up. Here are the steps to prepare a petty cash:

To start a petty cash fund, first decide on the amount of money needed for small purchases, usually 10,000 to 100,000 naira. Get the cash from your company’s main cash account and place it in a locked box with a slot in the top. Appoint a custodian, typically an accounting clerk, to be in charge of the fund.

The custodian should document each transaction in a journal or petty cash book, recording the date, amount, purpose, and get a receipt for each purchase. They should also periodically total the amounts in the journal and match that total to the actual cash left in the box to balance the account.

When the fund gets low, the custodian prepares a reconciliation report, receipts and the journal. Then get a reimbursement check from the main cash account to bring the petty cash fund back to its original balance.

Maintaining an adequate balance and frequently reconciling the account are key to properly operating a petty cash fund. Occasional audits by an outside accountant help ensure the fund is being used properly and that the amounts match what is recorded in the journal.

How is Petty Cash Operated

To operate the petty cash fund, follow these steps:

The custodian of the petty cash fund receives requests for petty cash reimbursements and payments from employees. They review each request to ensure it meets the company’s petty cash policy.

Once approved, the custodian disburses the cash from the petty cash fund for the requested amounts. They have the employee sign a petty cash voucher to acknowledge receiving the funds. The voucher details the date, amount dispensed, purpose of the petty cash, and the employee’s signature.

The custodian also receipts all expenses covered by petty cash like parking fees, office supplies, etc. They match up receipts and vouchers to their disbursements.

When the petty cash fund gets low, the custodian totals the vouchers and receipts. They prepare a reconciliation report to replenish the fund back to its original amount. The reconciliation summarizes the disbursements from the fund and is sent to the finance department to issue a replenishment check.

The new funds received are added to the existing petty cash balance. The cycle then continues as employees submit new petty cash requests to the custodian. Proper management and control of the petty cash fund is key to ensuring funds are used properly and transparently.

What is the System for Maintaining Petty Cash?

To manage petty cash, most businesses use one of three main systems: open system, fixed system, or imprest system.

The open or ordinary system means cash is withdrawn from the bank as needed. There’s no fixed amount, so the balance fluctuates. This is simple but less secure.

The fixed system sets a maximum for petty cash. Withdraw that amount from the bank, and replenish it as it’s spent. This caps the amount of cash on hand but requires frequent reimbursements.

The imprest system, the most popular, establishes a fixed fund, let’s say 100,000 naira. As money is spent, receipts and invoices are kept. When the fund gets low, the receipts are used to reimburse it back to 100,000 naira. This controls cash while minimizing reimbursements. The key is keeping meticulous records and receipts for every transaction.

How to Balance a Petty Cash Book?

Balancing your petty cash book regularly ensures your records are accurate and up to date. Here’s how to balance your petty cash book:

First, add up all the amounts in the ‘Amount Paid’ column of your petty cash book to get the total amount paid out. Next, count the actual cash on hand in the petty cash box or drawer. The amounts should match. If not, recount the cash and double check your additions.

If they still don’t match, you’ll need to find the difference. Recheck each entry in your book to ensure it’s recorded correctly. Look for any arithmetic errors in your calculations. Check that each expense has a properly authorized receipt or voucher.

Once the amounts match, rule a line under the last entry in your book. Write ‘Balance’ in the ‘Particulars’ column and the total amount in the ‘Amount Paid’ column. Also note the date you balanced the book.

Balancing your petty cash book regularly is key to keeping your business cash flow transparent and preventing loss or theft. Take the time each week or month to ensure this important task is done accurately.

What is the Operation of a Petty Cash Book Using the Imprest System?

The petty cash book is used to record small day-to-day expenses of the business. The head of the accounts department hands over a fixed amount of cash to the petty cashier. The petty cashier uses this cash to make small payments on behalf of the business.

When the petty cash in hand is about to exhaust, the petty cashier prepares a statement of account showing the expenses made and the related vouchers and sends it to the head of the accounts department. The head of the accounts department then reimburses the amount spent by petty cashier. In this way, the petty cashier always has some balance in hand to make the small payments.

How to post petty cash to the ledger?

To post petty cash to the ledger, follow these steps:

First, record the petty cash voucher number and date. Then, note the details of the expenditure like stationery, conveyance, etc. Next, mention the amount spent for each item.

Now, in the ledger, open the petty cash account and debit the total amount spent. Then, credit the expense account for the amount spent on each item. For example, if 2000 naira is spent on stationery and 1000 naira on conveyance, debit 3,000 to petty cash account and credit 2,000 to stationery account and 1,000 to conveyance account.

Finally, the petty cash account and expense accounts should tally. That is, the total debit to petty cash account should be equal to the total credits to various expense accounts. This ensures that the petty cash has been properly posted to the correct ledger accounts.

Advantages of Petty Cash Book

The petty cash book has several benefits, which includes the following:

1. Convenience: It’s convenient to record small payments without issuing cheques. Employees can get cash quickly for small expenses.
2. Saves time: Recording transactions in the petty cash book saves time as compared to maintaining a cash book and preparing bank reconciliation statements.
3. Control: The petty cash book helps in controlling misuse of cash because all expenses are recorded systematically. It provides a check on unauthorized payments.
4. Easy reconciliation: The petty cash book can be reconciled easily with the cash in hand and vouchers for expenses. This ensures that all payments made are duly authorized and accounted for.
5. No delay: Petty expenses can be met immediately in cash without any delay. Employees need not wait for cheques to be prepared and signed.
6. Less paperwork: Maintaining a petty cash book reduces paperwork as there is no need to prepare cheques and vouchers for small payments.
7. Inexpensive: The petty cash system is an inexpensive method for handling small payments. It does not involve any bank charges.
8. Useful for audit: The petty cash book provides useful information to the auditors for verifying expenses. All vouchers relating to payments are systematically filed for auditing.

Disadvantages of Petty Cash Book

The petty cash book has some disadvantages, which includes the following:

1. Chance of fraud: There is a chance of fraud as the cash is handled by a single person. He can misuse the cash for personal use.
2. Difficulty in control: It is difficult to exercise effective control over petty cash expenses as the entries are made loosely in the petty cash book.
3. Limitation of amount: The amount of petty cash is limited. All expenses beyond the imprest amount cannot be met from the petty cash fund.
4. Delay in reimbursement: If the imprest amount gets exhausted, the petty cashier has to wait for reimbursement. This may delay the payment of small expenses.
5. Extra workload: Maintenance of a petty cash book creates some extra workload for the accounts clerk. He has to record the expenses and get the reimbursements.
6. Problem of unclaimed amounts: Some amounts may remain unclaimed for a long time. This also creates problems in reconciling the petty cash account.
7. Rounding off problem: While recording expenses and reimbursements in the petty cash book, some rounding off problems may arise. This may create a slight difference in the petty cash account.

What is a Cash Book?

A cash book is a financial journal used to record daily cash receipts and payments. It helps track money flowing in and out of a business to ensure cash flow stays healthy.

The cash book format includes date, description, cash receipt, bank receipt, cash payment, and bank payment columns. Each transaction is recorded in the relevant columns, with the totals calculated at the end of the period.

For example, if you receive 20,000 naira in cash and deposit 15,000 naira in the bank, you’d record the details in the cash receipts and bank receipts columns. When you pay a vendor 5,000 naira cash and 75,000 naira by check, record it in the cash payments and bank payments columns. At month-end, you’ll know your cash on hand and be able to reconcile your bank statement.

A cash book is vital for managing your business’s cash flow and financial health. By recording all cash transactions in one place, you gain insight into your income, expenses, and available cash, helping ensure you have enough on hand to pay bills and funding for growth.

Types of Cash Book

There are three main types of cash books: single column cash book double column cash book, and triple column cash book:

Single Column Cash Book

It is the simplest form of cash book and is used to record only cash receipts and payments. It has only one amount column on each side.

Double Column Cash Book

The double-column cash book, also known as a two-column cash book, includes two columns on both the debit and credit sides, one to record cash transactions and one to record bank transactions.

Triple Column Cash Book

It has three amount columns on each side to record cash, bank and discount. The first column is used to record cash transactions, the second column is meant for bank transactions and the third column records discount.

What is the Difference Between a Cash Book and a Petty Cash Book?

A petty cash book is used to record small cash expenditures in a business, whereas a cash book is used to record all cash receipts and payments. Petty cash is mainly used for small, miscellaneous expenses, like office supplies or meals, that are not part of the company’s main budget. The key differences are:

1. Amount: Petty cash involves small amounts, while a cash book records all amounts.
2. Purpose: Petty cash is for minor expenses, a cash book tracks all income and expenses.
3. Recording: Petty cash uses a petty cash book, a cash book uses a general ledger.
4. Reconciliation: Petty cash is reconciled regularly, a cash book is reconciled with bank statements.
5. Responsibility: Petty cash is managed by a custodian, a cash book is maintained by the accountant.
6. Authorization: Petty cash expenses do not need approval, cash book transactions are authorized.
7. Reporting: Petty cash is reported to the accountant, the cash book is the basis of financial reports.
8. Auditing: Petty cash is subject to surprise audits, the cash book is audited with other books of account.

In summary, while a petty cash book and cash book are both used for recording financial transactions, they serve very different purposes in a business. The petty cash book is best for small, daily expenses, whereas the cash book provides an overall view of cash flows and is vital for accounting and reporting.

Frequently Asked Questions

Have questions about petty cash funds? Here are some common ones:

How does a petty cash book work?

A fixed amount of cash is set aside for the petty cash fund. As employees make small purchases, receipts are kept and amounts are recorded in the petty cash book. When the fund gets low, receipts are summarized and the total is reimbursed back to the original amount. This allows for efficient management of small routine purchases.

Do I need a petty cash book?

A petty cash book is useful for small businesses to keep track of minor expenses. It helps ensure transparency and accountability for cash transactions under a certain amount.

Who manages the petty cash fund?

Typically, a cashier or bookkeeper oversees the fund. They dispense cash for small purchases, record transactions in the petty cash book, and reconcile the account periodically.

How are expenses paid from petty cash?

Employees submit receipts and petty cash vouchers to withdraw cash for minor business expenses under a certain limit, like office supplies or parking fees. The bookkeeper reviews and approves the vouchers, then issues cash from the fund.

When is petty cash reconciled?

The fund should be reconciled regularly, often weekly or biweekly. The bookkeeper counts the remaining cash, adds up expenses in the book, and ensures the totals match the initial fund amount. If not, they investigate discrepancies and make corrections.

Does petty cash need approval?

Establishing or increasing a petty cash fund usually requires management approval. Individual expense requests over a specified limit also need approval before cash is disbursed. Approvals help ensure funds are used properly and responsibly.

How do I maintain a petty cash book?

To operate a petty cash fund:

• Designate an employee as the petty cash custodian.
• Decide on the maximum amount for each expense.
• Issue periodic reimbursements to restore the fund to its original amount.
• Require receipts or invoices for all expenses.
• Record entries in the petty cash book including date, amount, receipt number, and purpose.
• Balance the cash on hand with the recorded expenses periodically.
• Submit a summary report of the fund for auditing.

Is petty cash debit or credit?

Petty cash is recorded as a debit to the petty cash account and a credit to the cash account. When expenditures are made from petty cash, the petty cash account is credited and the appropriate expense account is debited.

What items are recorded in a petty cash book?

Common items recorded in a petty cash book include office supplies, postage, reimbursements, and other small purchases. The book should log the date, amount spent, purpose, and have receipts for each transaction.

What are the best practices for managing petty cash funds?

Some best practices for managing your petty cash fund include: keeping physical cash in a secure location, limiting access to only authorized individuals, documenting all transactions, and reconciling the fund regularly. An imprest petty cash system, where the fund is replenished periodically to a fixed amount, is ideal since it reduces the risk of loss or fraud.

Conclusion

So there you have it, everything you need to know about keeping a petty cash book for your small business or organization. By following the simple steps outlined here for setting up your petty cash fund, making disbursements, balancing, and replenishing as needed, you’ll find that keeping accurate records is a breeze. With a petty cash book in place, you’ll always know where your cash stands and have the documentation you need for accounting and taxes. Keeping tabs on the small stuff this way gives you more time and energy to focus on the big picture.