Petty cash funds are small amounts of currency and coins kept on hand in the office for making miscellaneous purchases. Petty cash, considered a current asset, doesn’t show on the balance sheet but is included within the total cash account. However, companies do have a general ledger account for petty cash funds to disclose the balance. Based on generally accepted accounting principles (GAAP), spending money from petty cash funds does not involve recording expenses, but instead involves gathering purchasing receipts. At the end of an accounting period, companies replenish their petty cash funds to bring them back to the original balance.
Petty cash funds are a more practical solution to paying for small expenses than an accounting concept involving different new entries. Instead of writing a check for purchases of only a few dollars, companies would rather pay directly in cash. Companies usually set a specific amount for the balance of their petty cash funds and may not change it during an accounting period. If the level of petty cash funds is too low as a result of ongoing purchases before the end of a period, companies may write a check to the petty cash funds to increase the amount of cash available.
The creation of petty cash funds amounts to an internal business transaction that requires a debit to petty cash and a credit to the general cash account. Petty cash is recorded as a current-asset account in the general ledger. The creation of petty cash funds does not involve any expenses even though it decreases the cash account. Once the petty cash funds are created, no accounting entries are used to increase or decrease the account for replenishment or purchases. Petty cash exists primarily for practical reasons, and as an accounting account, it serves only to categorize the account with a stated balance.
The uses of petty cash funds only involve expense-related purchases in small dollar amounts. As purchases are made, money in petty cash funds are replaced with purchase receipts, also called petty cash vouchers. The vouchers document specific purchases with information regarding the transaction date, amount, reason for the purchase and the people involved -- both the person receiving the money and the person disbursing the money. However, any decrease in petty cash does not require an accounting entry to credit the petty cash account nor does the related purchase require an entry to credit the expense as it occurs.
At the end of an accounting period, companies must replenish their petty cash funds to their stated balance as recorded in the general ledger account, if they have used any petty cash money during the period. The end-of-period replenishment is not dependent on the level of petty cash funds. Even if the level of petty cash funds is not low, companies need to replenish the funds at the end of an accounting period to record the related expenses. Replenishing petty cash funds replaces purchase receipts with newly added money, and thus, related purchase expenses are at last recorded as debits and the general cash account is credited with a check written to petty cash. But no entry is made to the petty cash account.
An investment and research professional, Jay Way started writing financial articles for Web content providers in 2007. He has written for goldprice.org, shareguides.co.uk and upskilled.com.au. Way holds a Master of Business Administration in finance from Central Michigan University and a Master of Accountancy from Golden Gate University in San Francisco.