Petty Cash Book Meaning

A petty cash book is an accounting book used to record the petty cash expenditures, i.e., small amounts that a company occurs in its day-to-day operations.

A petty cash book can be expressed as a formal summarization of petty cash expenditures, which refers to the regular day-to-day expenses of a business that are not related to the company’s direct line of business. Therefore, it is an accounting book for recording small expenses with little value.

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Key Takeaways

  • Petty cash books maintain day-to-day transactions that a company incurs, such as refreshments, water, etc.Accounting’s core lies in the journal, ledger, and petty cash book. Most transactions in the petty cash book are recorded in the cash account. There are two systems to record expenses in the petty cash book, the ordinary petty cash system and the petty cash system. Both are widely taught and used.Under the ordinary system, a bigger cash amount is given to the petty cashier. In the system, the petty cashier amount is fixed for a given period, usually a month or a week.

How Does Petty Cash Book Work?

  • The basis of accounting lies in the three main accounting termsAccounting TermsAccounting terminology can be termed a complete and detailed understanding of the terms used in accounting. Therefore, it is an essential element everyone must know before delving into accounting.read more and accounts: journal, ledgerLedgerLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more, and the petty cash book. Each transaction in the books of accounts goes through these three accounts to get captured.Journal is an integral part of bookkeeping, the starting point of accounting, and it records all the business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements.read more. From the initiation of the journal, the ledger account is prepared, with the help of which the final books of accountsFinal Books Of AccountsFinal Accounts is the final stage of the accounting process, in which the various ledgers maintained in the Trial Balance (Books of Accounts) of the organization are presented in the specified way to provide the profitability and financial position of the entity for a specified period to stakeholders and other interested parties, i.e. Trading Account, Statement of Profit & Loss, Balance Sheet, and so on.read more of the company are prepared. In contrast, the petty cash book records the transactions related to the cash account.However, several transactions during the ordinary course of the business are of negligible amounts and are not recorded in the cash book account. For transactions of such nature, the petty cash book is used.

Format of Petty Cash Book

Below is the sample format of the petty cash book:

The person responsible for recording the receipts and the payments is known as the petty cashier. The company’s administrative department usually maintains the petty cash book as the accounts departments generally take care of more significant business transactions. Additionally, the admin department is also responsible for such kinds of expenses.

Petty Cash Book Systems

The cash is given to the petty cashier on the following petty cash system basis:–

#1 – Ordinary Petty Cash System

Under this system, a lump sum amount of cash is given to the petty cashier. The cashier is responsible for keeping a record of all the expenses for the review of the head cashier. They must present it before requesting new funds to run the day-to-day expenditure again.

#2 – Petty Cash Imprest System

The companies have widely adopted Imprest Petty Cash System to run their petty cash account. Under the petty cashImprest System is a financial accounting system designed to track and document the utilization of cash. A petty cash system accounts for every petty cash transaction to maintain an equilibrium in the fund equal to petty cash receipts and additional money left.read more Imprest SystemImprest SystemImprest System is a financial accounting system designed to track and document the utilization of cash. A petty cash system accounts for every petty cash transaction to maintain an equilibrium in the fund equal to petty cash receipts and additional money left.read more, the petty cashier amount is fixed for a given period, usually a month or a week. Under this period, the cashier must run the petty cashPetty CashPetty cash means the small amount that is allocated for the purpose of day to day operations. It is unreasonable to issue a check for such small expenses and for managing the same custodians are appointed by the company.read more account under the given budget. At the end of the period, the cashier submits the report, and the amount spent by him is reimbursed so that the amount becomes equal to the beginning balance at the starting of the previous month. If the expenditure exceeds the amount, a special request stating the requirement needs to be raised to the head cashier to replenish the funds for a given time.

Advantages

  • Under this petty cash system method, the actual cash requirement is realized effectively. For example, if $1,000 is only spent a month on such expenses, the initial amount floated to the responsible party can be immediately increased or decreased after analyzing the period and the occurrence of expenses.It also minimizes the probability of any error during bookkeeping as the head cashier periodically reviews it.It has been a tried and tested, efficient and less time-consuming method.This method can also bring cost savings to the firm. The amount incurred in petty cash expenses is analyzed carefully and checked periodically to realize how much cash is required and where the company can cut down on unnecessary expenses in the petty items.Imprest petty cash system also allows staff members to handle cash effectively to prove their worth to their seniors and be seen as future cash managers.

Disadvantages

  • This system is sometimes lengthy, can become time-consuming, and often requires some resources to work behind it, which can also be deployed in other efficient and useful tasks.The system needs to be reviewed periodically. Each amount recorded must be mapped against each expense, which can become a prolonged process if the business’s quantum of entries is considerable.

Conclusion

A petty cash book is a manual system recording expenditure and is often prone to errors. It also becomes cumbersome to keep the books and record each transaction, especially in big companies. However, many companies are scrapping the old bookkeeping system to overcome this. Instead, they are now moving to modern bookkeeping methods like corporate credit cards or tally software, which are highly efficient systems for recording nominal and considerable business transactions.

So, to conclude, we can say that, over time, the petty cash book of recording has lost its importance. But, it can still be used as a handy tool to record companies where modern technology has not been introduced.

This article has been a guide to what Petty Cash Book is. Here we discuss the format of the Petty Cash Book, Types of Petty Cash Systems, including the Ordinary and Imprest System, along with its advantages and disadvantages. You may learn more about accounting basics from the following articles –

The difference between a petty cash book and a cash book is that a petty cash book is used to record small and repeated transactions, whereas a cash book is used to record transactions of larger sums.

The balance of the on-hand petty cash is calculated as the difference between the total of the debit and credit items. The book where little payments are made that are inconvenient to record in the main cash book is known as a petty cash book.

Petty-cash accounts must be kept in installments. To ensure that the available cash and the authorized petty cash vouchers add up, the custodian(s) should balance the fund daily. Petty cash withdrawals are restricted to $50 or less per person each month.

  • Debit vs Credit in AccountingCash Book ExamplesGeneral Journal