What is Petty cash?

A petty cash fund is a small sum of money that can be used to pay minor expenses without writing a check.

A petty cash fund is a small amount kept aside by company to pay for minor expenses such as office supplies or employee reimbursements.

This kind of fund will be reconciled on a regular basis, and transactions will be recorded on the financial statements. Each department in a larger corporation may have its own fund for the same.

These transactions are recorded using a different accounting system. To create such a fund, the cashier writes a check for the amount of funding assigned to a specific fund (usually a few hundred dollars). If there are enough bills and coins on the premises, the cashier could simply count out the cash for the same. The first petty cash journal entry is a credit to the cash account and a debit to the petty cash account.

The reconciliation process ensures that the remaining balance of the fund is equal to the difference between the original balance and the charges detailed on receipts and invoices. There is a shortage if the remaining balance is less than what it should be. There is an overage if the remaining balance is greater than what it should be. Although minor variations are permissible, when unbalanced, the source of the discrepancy should be identified and corrected.