In accounting, it is undeniable that each business, big or small, needs a proper method of handling its financial needs. One such vital tool is the petty cash book, which is a very important instrument identifying small daily or petty expenses of the business. They are expenses that cannot warrant the use of a cheque or bank transfer but should not be treated in an informal manner as that would compromise the financial reporting standards. In this blog, we will learn about the Petty cash book under Accounting its importance, what all types are used, its advantages & effective management tips.
What is a Petty Cash Book?
A petty cash book is a specific book used in business organizations to account for all small cash transactions within the organization. Such expenses usually encompass minor amounts incurred on matters such as stationery, stamps, employee refreshments, or small repairs. These are small transactions that cannot be effected through the writing of checks or bank transfers; they are made through petty cash.
A petty cash book is kept by a petty cash keeper or petty cashier and is used to record all petty cash transactions, this being after supporting it with receipts. A petty cash book is helpful here in that these small expenditures are also important for a business, and by using a petty cash book, such expenditures are unlikely to go unnoticed in the books of account.
Important Characteristics of a Petty Cash Book
- Date: The date of the transaction.
- Particulars: A short account of the expense.
- Voucher Number: The number used in the voucher or the receipt of the transaction.
- Amount: The amount of money spent.
- Payment Method: Whether the payment was in cash or in kind, i.e., in another form.
- Balance: The remaining quantity of petty cash balance after the particular transaction, if any, was in this compartment.
Why is Petty Cash Book Important?
The use of a petty cash book is very important in business organizations since, at times, minor expenses may go unnoticed and undocumented. Here are some reasons why keeping a petty cash book is essential in accounting:
- Accurate Financial Reporting: Each business transaction must be documented, including even penny purchases, because sound financial reports are crucial for any transaction. Petty cash books play a crucial role here so that minor expenses are not neglected, which also impacts the financial position of the business.
- Efficient Management of Financials: If these petty cash expenses are redeemed and booked under different accounts from major ones, it will be easier for the business to note them down. This is advantageous in cases of controlling, timing, and the amount of funds that are spent since the business owner can inspect the petty cash transactions at any one time.
- Improved Transparency: Using a petty cash book, businesses can ensure that they prove reasonable accountability to stakeholders, auditors, and tax authorities. The main advantage of maintaining petty cash documentation is that it helps minimize the chances of mistakes or even fraud.
Types of Petty Cash Book
There are primarily two types of petty cash books that businesses can use:
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Simple Petty Cash Book
The summarized petty cash book is common, with less engagement in petty cash transactions than those businesses use it. The third column on the skeletal drilling down involves only a single column for recording receipts and payments. This book is clear-cut and simple to work with, and it is mostly applied to companies with little expenses.
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Columnar Petty Cash Book
The columnar petty cash book is more detailed than the narrative and is used where petty cash transactions are high and the business is large. It also has different rows for different heads of expenses like stationery, conveyance, postages and other incidental expenses. This enables easier tracking of various uses of petty cash, thereby enabling improved control of financial resource uses for business organizations.
How to Maintain a Petty Cash Book?
The procedures involved in keeping a petty cash book are highlighted below. Here’s how to manage it effectively:
- Assign a Custodian: Assign one of the employees to be in charge of the petty cash fund. He or she would be in charge of all petty cash transactions and ensure that they record all the transactions in the petty cash book.
- Establish a Petty Cash Limit: An organization should establish a petty cash limit for guys running its commercial operations. This is the maximum amount of cash the petty cashier should hold at any period of time. When it attains a certain amount, it should be fed from the main cash account to ensure that the fund is always adequate.
- Record Transactions Promptly: Any petty cash transaction that takes place should be documented at that time. For each payment, a voucher should be awarded, and the entry should be made in the petty cash book. This helps make sure that there will be no other expenses to spend and that they are not missed out.
- Record petty cash vouchers every once in a while: In order to increase the reliability of the account, it is necessary to balance the petty cash book frequently. This includes comparing the amount of money in the petty cash box with the recorded transactions in the petty cash book. These should be researched and resolved.
- Replenish the Petty Cash Fund: After some time, when the petty cash fund has been utilized, it should be restored to its initial amount. This replenishment should be recorded in the main cash book and should be done in consultation with higher management.
In Summary
This blog has looked at the petty cash book as a necessity for every business so as to document small expenditures on a day-to-day basis. Petty cash book has the following benefits to any business, whether small or large. Such include Correct records of financial transactions, enhanced transparency, and enhanced control and checking of petty expenditures. This piece presents practices that should be followed in the petty cash book to improve efficiency in the business and compliance with generally accepted accounting principles.
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