Petty cash book: Format, types, operation, and advantages
All business expenses are equally important and must be tracked to maintain a steady cash flow and not go overboard, which damages the baseline. So, petty expenses are also one of the business spending categories, and this also has to be managed properly.
You might think that petty expenses are of small amounts and can be made on the go; why do you have to account for those as well? This is because these expenses can add up and become huge, and managing it afterward can be extremely tricky.
Learn about petty expenses, what is a petty cash book, petty cash book format, types of petty cash books, and much more.
First, let’s start with what is petty cash. It is a small amount of company funds kept aside to make minor or not-so-significant purchases. For example, daily travel tickets, office tea or coffee, sanitary products for the workspace, stationary, etc.
Now a petty cash book is a record account or cash account to take care of any expenses falling under the petty cash category. This means that instead of making these purchases with cheques or cards, you use tangible cash and coins.
You need to maintain a separate petty cash book from the actual accounting books because if all these small transactions are counted in the main cash book, your overall record will be overburdened.
A petty cash book is just a way to isolate these insignificant expenses from the major business transactions.
A petty cash book is not similar to your computer accounting record. Instead, it is a ledger book used to note down all petty expenses.
Whenever there is any payment made for smaller office or business expenses, that expense is recorded along with the amount and date in a petty cash book. Every company has a petty cashier who is responsible for maintaining the petty cash book.
Basically, the petty cashier receives money from the head accountant in the form of a cheque. That cheque is then converted to cash in the bank and recorded on the receipts side of the petty cash book.
Whenever an expense requirement is raised, the petty cashiers make a Petty Cash Voucher (PCV). Before giving this PCV, the cashier records the particulars of the expense, amount, date, and petty cash voucher number.
PCV has to be approved by the responsible authority before the payment is made.
This is what a general petty cash book looks like
As shown in the image, all expense categories have a specific column. Individual expense amounts are recorded to get the total spending from the given money and the total spending of particular categories.
There are two standard types of petty cash books:
A columnar petty cash book has two sides — one for the debit entries and one for the credit entries. This cash book style includes various columns to monitor everyday transactions.
There are separate columns to track each transaction's specifics, date, and debit or credit amount. The credit side has columns for all the cash expenses set in chronological order.
The money that comes from the head accountant is recorded on the debit side. Every time an expense is made, it is recorded under its specific column. Everything is tracked in a sequence.
In the end, there is a total money column on the credit side that tells you how much the total expense was.
An analytical petty cash book is different from the previous one as it has on single cash field on the debit side and a separate date field. The rest is as the columnar petty cash book.
The funds that the head accountant gives are stored before the expenses actually happen. Each petty cash expense has a separate column, and the totals of each expense are calculated automatically.
The amount in the total column is the same as that in the specific expense column.
There are three petty cash book maintenance systems:
The open system of petty cash maintenance is simple. The petty cashier is given a ballpark figure of money to handle the petty cash expenses. Once that amount is exhausted, the petty chairs submit the expense record to the head accountant.
After this, an approximate figure is given again, and the cycle repeats.
Unlike the open system, here, the petty cashier is given a fixed amount of money for a fixed amount of period. Once the period is over, the cashier submits the petty cash book account to the head accountant.
After this, that fixed amount is refunded, and the cycle continues. This is a great way to keep your petty expenses under a budget. Having a fixed amount limits anything extra to be purchased or paid for.
In contrast to the previous method, the petty cash maintenance imprest system is extremely popular. In this method, a total amount for petty cash expenses is calculated for a period of time, and that amount is advanced as the budget for that duration.
This amount is given as petty expense budget is called imprest cash. Once the duration is over, a detailed report is submitted to the head accountant, which means that the petty cash account is now back to zero.
Again the same process is repeated of calculation and advancing budget amount.
The imprest system is not the most popular petty cash maintenance system by chance. It helps to save an exorbitant amount of time for the head accountant, or chief cashier.
They are responsible for looking over and working on the main cash books of the business; spending time on petty expenses will just be a sheer waste of time. Hence, the imprest system.
Along with this, another great benefit of the imprest petty cash system is no cash misuse. The petty cashier is not allowed to store or hold back any residual amount if left from the given budget.
All petty expenses must be made within that limit, and a detailed report must be submitted to the head.
This induces transparency and eliminates any misuse. Plus, there cannot be any miscalculation or extended amount allotted for petty expenses, as this is supposed to be a small amount.
Moreover, the imprest petty cash method is a great way to help freshers or junior accounting staff to learn the ways of the company and the tasks.
Along with this, there is very minimal chance of any error, and even if there are mistakes, they can be quickly resolved. This is because the head accountant checks the petty cash book in a set period of time.
All company expenses, in general, are made through cheques or online fund transfers. However, when it comes to petty expenses, instead of cheques, cash is used. Here is how petty cash is operated:
Your first step is to select and appoint a petty cashier. This cashier is responsible for all activities related to petty cash funds and expenses. A certain amount of funds is given to this employee in the form of a cheque.
This cheque is then converted to cash and stored to make payments. As the petty cash fund is a fixed amount, there is no need for a new journal entry every time the funds are refreshed.
Now that the petty cashier has the funds, day-to-day business expenses can be made easily. Plus, all these will be made in compliance with the company expense policies.
So, if the business finance heads have put restrictions on some category of expenses or specified a particular vendor for specific expenses, all those rules will be duly followed.
All the expense receipts of petty cash vouchers have to be signed by the cashier and the one receiving them. Petty cash funds decrease with every expense. This means that the total spend must be equal to the total amount allotted in the beginning.
Only then will the petty cash book be approved by any auditor.
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Once the previously allotted amount is exhausted, the petty cashier has to submit a request for a refund.
For this, they are required to submit a petty cash expenditure statement and a collection of all the receipts to the finance department of the company. All of the data is verified, and only then another cheque for the next time period is issued.
Here is an example of how petty cash is posted in a ledger
The head accountant gives the petty cashier a cheque for 103000 INR; it is recorded in the primary cash book. The credit side will show a total of 103000 INR to denote total payments.
Then all the above categories of payments are deducted from the journal. So wages, stationary, followed by tea and refreshments and so on. Now the total amount given will equal the total amount spent.
The petty cash book system is a powerful way to keep track of daily business expenses and fulfill requirements easily. This is because there is a certain amount of money given to the responsible person, and from there on, daily expenses are made on the go.
Plus, over every time period, you can revise the expenses and increase or decrease the allotted budget. The chief accountant also evaluates the petty cash book at regular intervals, so there is no chance of accounting errors or mistakes passing through the system.
Moreover, one of the so many advantages of petty cash books is that expense tracking with petty cash books becomes quick and easy.
This is because a fixed amount of money is allotted, and for every expense, a PCV is issued; plus, the receipts must be signed by both the cashier and the recipient.
Hence, everything is legitimately authorized and stored so that, in the end, the allotted amount matches the spent amount.
Furthermore, you will not have to worry about reimbursements and the hassle of the process.
As even the smallest expenses will be made through the money allotted by the company, your employees will not have to spend from their pockets, and hence reimbursement will not be in question.
This also reduces any chance of fraud because altering the spending amount or spending more than required is not possible.
Everything has its pros and cons. Not so significant, still petty cash books also have a few disadvantages, which can be taken care of if you maintain them the right way and with full vigilance. The first disadvantage is mismanagement and theft.
As there are numerous small daily expenses, it can be cumbersome and tedious to take care of all transactions and report them accurately.
This creates a small loophole for theft. It can be exhausting to find out if the employees are spending the right amount and aren't overexaggerating.
Moreover, if the petty cash book is not monitored and rechecked regularly, there are high chances of non-compliance and errors. This will, in turn, disrupt the whole audit process.
This is a common but important one. Setting spending guidelines and limits. To ensure fraud aversion and avoid overspending, putting a ceiling limit on each petty expense category or type is essential.
So, for example, the petty expenses categories of your business are refreshments, bus tickets, office stationery, postage, and other miscellaneous expenses.
Now according to the previous spend analysis time frame, you can evaluate and decide on a fixed spend amount for each type. Plus, you also have to list down rules for making these expenses, like process, receipt requirements, voucher validity, etc.
Maintaining a petty cash book using any of the above-mentioned systems has one crucial step — regular auditing and rechecking. The petty cashier has to submit the expense record at regular intervals.
These regular audits will help to avoid any errors or loopholes in the system. Along with the regular ones, the head accountant or financial manager must sometimes call for surprise checks as well.
These surprise checks are important to check if any employee is getting away with fraud and that everything is maintained according to the process.
This can be tedious but is extremely essential. Ask your employees and the petty cashier to keep a record and store all the expense receipts.
Having paper documents and receipts for petty expenses might sound negligible; however, with these, you can always tally up the amount that was allotted and the expenses that were made.
You can be sure that no amount digits were altered in the book and that all expenses were compliant with the spending policies.
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Even though the petty cash book is maintained by a petty cashier, the head accountant must look over it. Plus, all the expense policies for other businesses and petty expenses should follow the same baseline.
This helps to maintain centralized control. The business will always have streamlined expense management and error-free audits if everything is divided from the top down with the same policies company-wide.
All business expenses have to be managed and tracked properly. Everything boils down to what type of tool and systems you use for this. Let us introduce you to the ultimate tool for expense management — Volopay!
An all-in-one spend management platform designed to make financial management a piece of cake for all businesses. When it comes to petty cash management, one of the tools offered by Volopay is the best solution for it.
Prepaid cards can be assigned to your employees with individual card spending limits. Any expense under the allocated funds will be automatically approved. Anything over that will require approval.
All the expenses are tracked in real-time and recorded in a centric database. This database can be accessed anytime. Moreover, these prepaid cards ensure that all transactions are in compliance with company policies. Anything suspicious will be automatically flagged.
Now let’s come to the tedious problem of maintaining a petty cash book. Volopay prepaid cards and expense management system take care of that as well. With a direct accounting integration feature, all expenses are automatically entered into the accounting sheets.
All the data is accurate with the help of auto-categorization and expense mapping rules.