A petty cash system is an organizational procedure for making cash readily available for miscellaneous expenses instead of writing a check. It allows employees to have a small amount of cash on hand to make purchases without having to go through a formal purchase request procedure. Even though a petty cash allotment is designed to make daily operations easier, the money must still be accounted for through the company's bookkeeping.
Every business must maintain a bookkeeping system to track income and expenses. This information allows the company to comply with government regulations regarding taxes and financial reporting. Most businesses will require an employee to make a formal request for an expense to be paid in addition to submitting an invoice or purchase order. The expense is then paid by company check, which creates a paper trail to substantiate the transaction for auditors.
A company's petty cash system is designed to provide a simplified alternative to the ordinary purchasing process. An amount of money is kept accessible and used when an employee needs to make a purchase that is below a certain threshold established by the company. A typical use of petty cash is to buy office supplies that are needed immediately and that cannot wait for days or weeks for the company to cut a check.
There are a number of ways a company can account for petty cash in its bookkeeping system. The most popular way is to use an imprest system. This type of petty cash system requires a company to first set aside petty cash by writing a check for an amount of money to be withdrawn from the business bank account. The transaction would be recorded in the books as a debit to the petty cash account and a credit to the cash account.
Anytime an employee needs to make a purchase using petty cash, he would fill out a request form. The money would be given over in exchange for the form. Once the purchase is made, the employee submits the receipt to be attached to the form. The petty cash fund at this point consists of the remaining cash and the forms with receipts. At any time a person could audit the petty cash system by adding up the cash and the receipts to ensure they equal the original amount of money that was placed in the fund.
The imprest system allows petty cash to be replenished by handing over the forms with receipts in exchange for cash that would go back into the fund. A check would be written to cash that would credit the cash account. This time, however, the receipts would indicate which expense accounts to debit. For example, a common petty cash system transaction would debit the office expense account upon replenishment if office supplies were purchased with the money.