Petty cash refers to small amounts of cash kept on hand in a business. The term petty comes from petite or small. Petty cash is the small amount of cash and coins that an organization uses for minor purchases and providing change to customers. There are two reasons to keep petty cash which includes paying for small purchases which require cash, such as food for the office lunch or coffee supplies or for parking. Most retail businesses keep a cash drawer .Every purchase using petty cash must be documented in the same way as other business income and expenses. Using a petty cash log or petty cash slips will help capture these expenses so they can be used to balance income for business tax purposes.
The most common way of accounting expenditures is to use the imprest system. The initial fund would be created by issuing a check for the desired amount. The entry for this initial fund would be to debit petty cash and credit cash. As expenditures are made, the custodian of the fund will reimburse employees and secure a petty cash voucher in return. Oversight of petty cash is important because of the potential for abuse. Use of petty cash is sufficiently widespread that vouchers for use in reimbursement are available at any office supply store.
Benefits of Petty cash
The main advantages of Petty cash book are as follows:
Reduction in number of transaction: many expenses of small nature are recorded in petty cash book. Hence the number of transactions is reduced in the cash.
Reduction of errors: as the head cashier checks the accounts of previous months and gives advance for upcoming month, thus the errors will be reduced.
Savings in time and labor: as the head cashier records all the transactions, there is a great amount of time and labor saved.
Check on expenses: from time to time the accounts are verified by the head cashier, thereby minimizing the chances of misuse of money.
Control on petty expenses: while checking the total of such expenses, the head cashier can raise objections on undesirable expenses.
Facility in posting: since only small expenses are recorded in cask book, posting in direct ledger becomes easier.
Saving of space: only the total of all the expenses are recorded in cash book and ledger account, hence saving space.
Differentiation between personal and business expenses: as only small expenses are recorded in the cash book, the personal and the business expenses to some extent can be easily identified and separated.