Question

What is Petty Cash and how is it represented on the balance sheet? What types of expenses are used with petty cash?

Answer 1

Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing, and then cashing the cheque.

The most common way of accounting for petty cash expenditures is to use the imprest system. The initial fund would be created by issuing a cheque for the desired amount. An amount of $100 would typically be sufficient for most small business needs as the expenses to be covered are for small amounts. The bookkeeping entry for this initial fund would be to debit Petty Cash and credit bank account. This cheque would then be cashed to acquire the actual cash needed for payments.

As expenditures are made, the custodian of the fund (a bookkeeper or a member of the administration staff) will reimburse employees and receive a petty cash voucherwith a receipt/invoice attached in return. At any given time, the total of cash on hand plus reimbursed vouchers must equal the original fund.

When the fund gets low, e.g. $20 remaining, the custodian requests a top up and submits the vouchers for reimbursement. Assuming the vouchers add up to $80, an $80 top up cheque is issued and an $80 debit towards office expenses is recorded. Once the cheque is cashed, the custodian again has cash at the original amount of $100.

REPRESENTED ON THE BALANCE SHEET :

Petty cash appears within the current assets section of the balance sheet. Since petty cash is highly liquid, it appears near the top of the balance sheet. However, the balance in thepetty cash account is so small that it is rarely listed on the balance sheet as a separate line item.

Examples: It depends on nature of business.Some are as follows.

Telegram, postage, stationary, convenyance,Traveling, Taxi hire,Tiffins, etc.,