Managing cash transactions can be tricky for small businesses. It's easy to lose track of expenditures when relying on loose receipts and messy accounting.
Using proper petty cash and cash book accounting methods helps streamline the tracking process. This article explores the key differences between these two critical systems.
You'll learn the unique features and appropriate uses of petty cash versus cash book accounting. With this knowledge, you can implement the ideal approach to manage your cash and provide financial transparency.
Introduction to Petty Cash Accounting and Cash Book Accounting
Petty cash accounting and cash book accounting are two common practices used by small businesses to track cash transactions. The key difference lies in the level of detail and oversight.
Defining Petty Cash Accounting
Petty cash accounting refers to the management of a small amount of cash kept on hand for minor business expenses. For example, a business may keep $100 in a petty cash box for buying office supplies, parking fees, or other small purchases made with cash. Typically, one person manages petty cash spending and keeps receipts for all transactions.
Defining Cash Book Accounting
A cash book, also known as a cash journal, is a more formal record-keeping system for all cash inflows and outflows. Unlike petty cash, a cash book tracks every cash transaction, no matter how small. This provides greater visibility and control over how cash moves through the business.
Key Differences Between the Two Methods
The main differences between petty cash and cash book accounting include:
- Oversight: Petty cash has little oversight compared to a cash book system with transaction details.
- Transaction sizes: Petty cash handles small purchases only, while a cash book tracks all transactions.
- Reconciliation: Petty cash may be reconciled monthly or when the fund is low. Cash books are reconciled with bank statements as often as daily.
In summary, petty cash and cash books meet different business cash accounting needs. Petty cash offers convenience for small purchases, while cash books provide comprehensive tracking and oversight of all cash flows.
What is the difference between cash account and petty cash account?
Petty cash is used for small, miscellaneous cash expenses, while a cash account refers to a company's overall cash balances and transactions. The key differences are:
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Purpose: Petty cash is used for minor purchases under a set limit, like office supplies or lunch meetings. A cash account tracks all cash coming in and out of a business from revenues, expenses, investments etc.
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Dollar amount: Petty cash funds are usually only $100-$500. Cash accounts hold much larger amounts equal to the company's overall cash assets.
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Management: An appointed petty cash custodian manages disbursements from a petty cash box or account. The finance/accounting department manages broader cash accounts.
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Tracking/Reporting: Petty cash reconciliations and replenishments are tracked outside the general ledger. Larger cash transactions are recorded in the general ledger and financial statements.
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Accessibility: Petty cash is easily accessible to make convenient purchases. Access to the main cash accounts is restricted to authorized finance staff.
In summary, petty cash provides convenient access to small amounts of cash for minor business purposes, while a company's overall cash accounts hold operating capital and are more closely governed by financial controls. Maintaining separate petty cash funds simplifies low-value spending.
What is the difference between cash book and cash accounting?
A cash book and a cash account serve different purposes in accounting:
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A cash book is a separate ledger or book where all cash transactions are recorded in detail, including cash receipts (money received) and cash payments (money paid out). It serves the combined purpose of a journal and a ledger for tracking cash transactions.
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A cash account, on the other hand, is a general ledger account that summarizes cash transactions. The cash account is credited when cash is received and debited when cash is paid out.
The key differences are:
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Purpose: Cash book records transactions; cash account summarizes transactions into an account.
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Structure: Cash book serves journal and ledger functions in one place; cash account structured as a ledger.
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Detail: Cash book captures detailed transactions; cash account shows net increases/decreases in cash.
So in summary, a cash book provides a detailed record of cash inflows and outflows, while a cash account shows the net effect of those transactions on the cash balance. Businesses use both tools as part of their overall accounting and bookkeeping process to track cash activity.
What accounting type is petty cash?
There are two main types of petty cash books used in accounting:
Columnar Petty Cash Book
A columnar petty cash book has separate columns for different types of expenses, such as stationery, postage, traveling, etc. This allows transactions to be categorized and analyzed by expense type.
The key features of a columnar petty cash book include:
- Separate columns for different expense categories
- Easy to record and classify transactions
- Supports analysis of expenses by category
Imprest Petty Cash Book
An imprest petty cash system means the petty cash float is restored to a fixed amount on a regular basis. For example, if the float is $100, when money is spent and the balance falls below $25, the float is replenished back to $100.
The advantages of an imprest petty cash system are:
- The petty cash fund always contains the same amount
- No need to keep track of expenses
- Easy to monitor and reconcile
So in summary, columnar petty cash books categorize transactions and imprest petty cash fixes the float to a set amount. Both methods help streamline petty cash management.
How do you record petty cash in cash book?
When your petty cash cashier puts money into the petty cash fund, they must create a journal entry in your books. The entry must show an increase in your Petty Cash account and a decrease in your Cash account.
To record petty cash in the cash book, follow these steps:
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When petty cash is replenished, debit the Petty Cash account and credit the Cash account for the amount replenished. For example, if $100 was added to petty cash, debit Petty Cash $100 and credit Cash $100.
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For each petty cash expenditure, debit the relevant expense account and credit the Petty Cash account. For example, if $30 was spent on office supplies from petty cash, debit Office Supplies Expense $30 and credit Petty Cash $30.
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When doing your bookkeeping, the total debits to the Petty Cash account should equal the amount of petty cash that is currently on hand physically as currency and receipts.
Recording petty cash transactions this way shows the true impact of petty cash spending on your finances. The expense accounts are updated immediately when petty cash is spent, rather than just when petty cash is replenished. And reconciling the Petty Cash account ensures accuracy of your records.
Using a columnar petty cash book can make the record-keeping process simpler. The amount, date, receipt number, account debited, and running petty cash balance can be tracked in the columns. This avoids having to create journal entries every time petty cash is spent.
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Understanding the Importance of Cash Book in Accounting
Maintaining an accurate cash book is critical for businesses to effectively track cash inflows and outflows. Compared to a petty cash book which handles small expenditures, a cash book provides more extensive accounting of all cash transactions.
Advantages of Cash Book Over Petty Cash
- Captures all cash transactions rather than just minor expenses
- Enables reconciliation with bank statements
- Supports more comprehensive financial reporting
- Provides clearer insight into cash position
- Allows better cash flow forecasting and budgeting
5 Uses of Cash Book in Daily Business Transactions
- Recording cash sales and purchases
- Tracking accounts receivable and payable
- Monitoring cash discounts and returns
- Reconciling with bank statements
- Preparing cash flow statements
Importance of Cash Book for Financial Transparency
An up-to-date cash book is vital for financial transparency. It serves as an authoritative record of cash activities, ensuring strong internal controls and governance. This minimizes risks like fraud and errors. With a detailed cash book, businesses can clearly demonstrate how money has been received and spent to stakeholders like investors, auditors, and tax authorities. Maintaining a well-organized cash book is thus an integral part of ethical financial management.
Exploring the Features of Petty Cash Book
A petty cash book is a simple cash book used to record small, routine cash expenses in a business. Here we explore key features that define its usefulness:
Features of Petty Cash Book
Some key features of a petty cash book include:
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Easy to use - Petty cash books are simple to set up and do not require complex accounting knowledge to maintain. This makes them accessible for small businesses and non-accountants.
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Tracks small purchases - The petty cash fund is used for small, everyday expenses under a set limit, usually $100 or less. Purchases are supported by receipts and recorded in the book.
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Single entry bookkeeping - Only a single entry is made to record the expense amount withdrawn from the petty cash fund. This saves time compared to the double entry required in a general cash book.
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Provides expense details - Date, description, amount and category details are recorded for each expense. This helps track exactly how petty cash is being spent.
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Allows reconciliation - Regular reconciliation between recorded expenses and remaining cash helps ensure accuracy and prevent misuse.
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Supports reporting - Expenses can be easily categorized and tallied to generate spending reports for management analysis.
Advantages and Limitations of Petty Cash Accounting
Using a petty cash system has some notable pros and cons:
Advantages
- Provides convenience and efficiency for small purchases
- Saves time compared to formal invoice/payment process
- Gives detailed visibility into minor business expenses
Limitations
- Risk of loss, theft or improper use of cash
- Reconciliation can be time-consuming
- Less oversight and control than main cash accounts
While petty cash has its benefits, the cash basis and informal recordkeeping mean businesses should ensure proper petty cash management policies are in place. Regular oversight helps minimize risk while allowing staff to conveniently cover minor approved expenses.
Cash Book Entries Examples and Their Applications
Cash books are an important accounting tool to record cash and bank transactions. Maintaining accurate records in the cash book is crucial for understanding cash flow and making sound financial decisions.
Sample Entries for Common Transactions
Here are some examples of typical cash book entries for common business transactions:
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Cash sales of $1,000 to a customer are recorded as a debit of $1,000 to the cash account.
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Payment of $500 to a supplier by check is recorded as a credit of $500 to the bank account.
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Depositing $300 cash received from a client into the bank account is recorded as a debit of $300 to the bank account and a credit of $300 to the cash account.
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Withdrawing $100 cash from the bank account for petty cash expenses is recorded as a debit of $100 to the petty cash account and a credit of $100 to the bank account.
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Payment of $50 to an employee for travel reimbursement made by check is recorded as a debit of $50 to travel expenses and a credit of $50 to the bank account.
Analyzing the Impact of Accurate Cash Book Entries
Maintaining an accurate cash book is extremely important for several reasons:
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It enables reconciliation with bank statements to detect discrepancies.
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It provides necessary information to prepare financial statements and reports accurately.
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It supports cash flow analysis and forecasts to aid financial decisions.
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Complete records help with tax calculations and compliance.
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Detailed entries prevent losses from fraud or data entry errors.
In summary, proper cash book accounting is vital for financial control and operational efficiency. The examples above illustrate typical entries, but the impact of precision and care in the entire record-keeping process is substantial.
Types of Cash Books and Their Specific Uses
Cash books are an important accounting tool to record and track cash transactions. There are a few different types of cash books, each serving a different purpose:
What is Single Column Cash Book
A single column cash book is the simplest form of cash book. It has one money column on each side - one for receipts/incomes and one for payments/expenses. All cash received is recorded on the debit/left side and all cash paid out is recorded on the credit/right side.
The single column cash book provides a chronological record of all cash transactions for a business. It helps track cash inflows and outflows in one place. This cash book is useful for small businesses that have limited transactions.
Some key features of a single column cash book:
- Simple format to record cash receipts and payments
- One column for all cash inflows, one for all outflows
- Entries recorded in chronological order by transaction date
- Helps track total cash position over time
What are the 3 Types of Cash Book
The three main types of cash books are:
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Single Column Cash Book: As explained above, this contains a single column for recording all cash receipts and payments.
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Two Column Cash Book: This cash book splits receipts and payments into separate debit and credit columns. One debit column records cash sales, debtor receipts, and any other cash inflow. The credit column records cash purchases, creditor payments, and other expenses paid by cash. This format provides more detail on the exact sources of cash inflows and outflows.
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Three Column Cash Book: This further breaks down cash transactions into three columns - Cash, Bank, and Discount. The Cash and Bank columns separately record physical cash transactions vs bank transactions. The Discount column captures any discounts received or given. This is the most detailed cash book format.
The type of cash book used depends on the size and needs of the business. Larger companies tend to use Three Column cash books, while smaller businesses can rely on Single Column cash books. Proper cash book management is crucial for understanding a company's liquidity position.
Best Practices for Implementing Cash Book and Petty Cash Systems
Integrate with Main Accounting System
Integrating petty cash and cash books with your central general ledger and wider accounting system is crucial for maintaining accuracy and transparency. This enables you to track all cash transactions from across the business in one place. Some tips:
- Set up accounts in your general ledger software to represent petty cash and various cash books. Connect recurring downloads or manual inputs.
- Standardize account codes used in cash books so they can be mapped properly.
- Configure user access permissions so only approved staff can record transactions or modify books.
Consistent Recording Policies
To avoid confusion from inconsistent data entry, establish organization-wide policies that dictate how every cash transaction should be recorded into petty cash books or cash books. This includes:
- What information is required (date, amount, vendor, account codes, approvals, etc.)
- Who can enter transactions
- Which book certain transactions should go into
- When transactions should be entered and approved
Standardizing recording policies improves integrity and facilitates reconciliations.
Regular Reconciliation
Frequently reconciling petty cash and individual cash book balances is key to ensuring accuracy and preventing fraud. Best practice is reconciling every 2-4 weeks.
- Reconcile petty cash physical count to book balance
- Reconcile each cash book total to bank statement deposits
- Investigate and resolve any discrepancies
- Have manager review and formally approve reconciliation
Staying on top of reconciliations enables you to catch any issues early before they become major problems. It also deters fraud by employees.
Conclusion and Key Takeaways
Petty Cash for Small Expenditures
Petty cash is best used for small, occasional cash purchases without receipts. It fills a niche for handling minor expenditures that would be cumbersome to process through the main cash accounting system. Keep petty cash rules and oversight simple, with just enough tracking to prevent abuse.
Cash Book for Robust Tracking
Cash books shine for systematically recording all transactions impacting cash balances. Their detailed entries help identify discrepancies and provide transparency into how every dollar enters or leaves the business. Integrate cash books with accounting software for consolidated financial reporting.
Integrate Systems for Best Results
Petty cash and cash books serve complementary purposes. Use petty cash sparingly for tiny purchases as needed, while recording all other cash flows in the cash book. Feed data from both tools into central accounting systems for comprehensive tracking and financial statements. The integrated approach provides the right level of control and visibility across all cash transactions, both big and small.
