How the Petty Cash Book Works

In the previous chapter, we mastered the Double and Triple Column Cash Books, learning how businesses record their major cash and bank transactions, along with cash discounts. We saw how the main cash book acts as the central nervous system for a company's liquid money.

But imagine a busy Head Cashier at a large manufacturing firm. In one hour, they might sign a cheque for ₹5,00,000 to buy new machinery, receive a ₹2,00,000 bank transfer from a major client, and pay ₹50,000 in cash for monthly rent.

Now, imagine the office assistant walking up to this same Head Cashier and asking for ₹30 to pay for a guest's tea, ₹150 for an auto-rickshaw fare to the post office, and ₹40 for a box of staples.

If the Head Cashier had to stop their critical work to hand out ₹30, verify the tea receipt, and record that tiny transaction in the massive Triple Column Cash Book, the accounting department would grind to a halt. Furthermore, the main cash book would become incredibly cluttered. Pages and pages would be filled with ₹20 and ₹50 entries, making it nearly impossible to track the large, important transactions at a glance.

To solve this problem, businesses use a Petty Cash Book.

What is Petty Cash?

The word "petty" comes from the French word petit, meaning small. In accounting, petty cash refers to a small amount of physical cash kept on hand by a business to pay for minor, everyday expenses.

Instead of the Head Cashier handling these, the responsibility is delegated to a junior staff member, known as the Petty Cashier.

The Head Cashier gives the Petty Cashier a lump sum of money at the start of the month. The Petty Cashier keeps this money in a locked drawer or cash box. Whenever someone in the office needs to make a small purchase, they go to the Petty Cashier, not the Head Cashier.

Why Keep it Separate?

1. 1Saves Time: The Head Cashier is freed from dealing with dozens of tiny transactions daily.
2. 2Prevents Clutter: The main cash book remains clean, showing only significant cash and bank movements.
3. 3Division of Labour: It delegates routine work to junior staff, improving office efficiency.
4. 4Better Control: It is easier to audit and control small expenses when they are grouped together in one dedicated book.

The Imprest System: The Heart of Petty Cash

You might be wondering: if we give a junior employee a box of cash, how do we stop them from misusing it? How do we keep track of what they are spending?

This is where the Imprest System comes in. It is the most scientific, secure, and widely used method for managing petty cash.

Let's break down exactly how this works with a concrete example.

Imagine a business decides that its petty cash "float" (the fixed imprest amount) will be ₹5,000 per month.

1. 1The Advance: On April 1st, the Head Cashier gives the Petty Cashier ₹5,000 in cash. The Petty Cashier's balance is now ₹5,000.
2. 2The Spending: Throughout April, the Petty Cashier pays for small expenses. They pay ₹500 for postage, ₹1,200 for printer ink, and ₹300 for auto fares. For every single payment, they collect a bill or a receipt (called a voucher).
3. 3The Total: By April 30th, the Petty Cashier has spent a total of ₹2,000. If we look in their cash box, they should have exactly ₹3,000 left in physical cash (₹5,000 original float - ₹2,000 spent).
4. 4The Reimbursement: On May 1st, the Petty Cashier takes their book and their ₹2,000 worth of receipts to the Head Cashier. The Head Cashier checks the receipts. Seeing that ₹2,000 was legitimately spent, the Head Cashier hands the Petty Cashier exactly ₹2,000.
5. 5The Reset: The Petty Cashier puts that ₹2,000 into their cash box, which already had ₹3,000 in it. Their balance is magically restored to the original ₹5,000 float, ready for the new month.

The Lifecycle of Petty Cash

Here is the continuous loop of the imprest system in action:

Types of Petty Cash Books

There are two main ways to draw the format of a petty cash book:

1. 1Simple Petty Cash Book: This looks exactly like a standard single-column cash book. It has one column for receipts on the debit side, and one column for payments on the credit side. While easy to maintain, it isn't very useful because it doesn't categorize the expenses.
2. 2Analytical Petty Cash Book: This is the standard format used by almost all businesses. It has multiple columns on the payment side to automatically sort expenses into categories (like Postage, Stationery, etc.) as they are recorded.

Because the Analytical Petty Cash Book is the industry standard and the focus of your syllabus, we will dive deep into how it works.

The Analytical Petty Cash Book Format

The word "analytical" means to break something down into its component parts. An Analytical Petty Cash Book takes the total amount spent and breaks it down into specific expense categories.

Since we cannot draw a massive ledger on a single page, let's walk through the columns of an Analytical Petty Cash Book from left to right. Imagine a wide ledger book open in front of you.

• Receipts (₹): This is the very first column on the left. It records the money received from the Head Cashier. (This is the debit side).
• Date: The date the transaction occurred.
• Voucher Number (V.N.): Every payment must be backed by a receipt or a signed slip. These are numbered serially, and that number goes here.
• Particulars: A brief description of the transaction. We write "To Cash A/c" or "To Bank A/c" when receiving the float, and "By [Expense Name]" when making a payment.
• Total Payments (₹): Every single time money leaves the petty cash box, the amount is written in this column.

Now, immediately to the right of the "Total Payments" column, we create several Analysis Columns. The exact headings depend on the business, but common ones include:

• Postage & Telegrams: For stamps, courier charges, and registered post.
• Printing & Stationery: For pens, paper, printer ink, and staplers.
• Conveyance / Travelling: For auto fares, bus tickets, and taxi fares for staff traveling locally for business.
• Cartage / Freight: For paying laborers to load/unload goods, or small transport fees for bringing goods to the office.
• Office Expenses / Refreshments: For tea, coffee, snacks for guests, or cleaning supplies.
• Sundries / Miscellaneous: This is the "catch-all" column. If an expense is rare (like buying a ₹50 padlock or paying a ₹100 charity donation), it doesn't need its own dedicated column. It goes into Sundries.

How the Columns Work Together

When the Petty Cashier makes a payment, they record the amount twice on the same line: First, they write the amount in the Total Payments column. Second, they write that exact same amount in the relevant Analysis Column.

Why Use the Analytical Format? (The Ledger Magic)

You might ask: Why bother writing the amount twice? Isn't that just extra work?

The answer lies in how we transfer (post) these numbers to the main General Ledger.

If we used a Simple Petty Cash Book, the accountant would have to look at every single line item at the end of the month. If there were 15 separate purchases of stationery, the accountant would have to make 15 separate entries in the Stationery Account in the General Ledger. That is exhausting.

With the Analytical Petty Cash Book, the work is already done. At the end of the month, the Petty Cashier simply totals the bottom of the "Printing & Stationery" column. Let's say the total is ₹850.

The accountant takes that single number—₹850—and posts it to the debit side of the Stationery Account in the General Ledger as one single entry: "To Sundries as per Petty Cash Book... ₹850".

The analytical columns save the accounting department hours of tedious ledger posting.

Worked Example: Recording a Month of Petty Cash

Let's see this in action. Assume a business maintains an imprest amount of ₹2,000. We will record the transactions for the first week of June.

Transactions:

• June 1: Received imprest cash from Head Cashier: ₹2,000
• June 2: Paid for auto fare to bank: ₹150
• June 3: Bought pens and notepads: ₹300
• June 4: Paid for speed post: ₹50
• June 5: Paid for office tea and snacks: ₹200
• June 6: Paid cartage for unloading a parcel: ₹100

Step-by-Step Recording:

1. 1June 1: In the Receipts column, write ₹2,000. In Particulars, write "To Cash A/c".
2. 2June 2: In Particulars, write "By Conveyance". In Total Payments, write ₹150. Also write ₹150 in the Conveyance analysis column.
3. 3June 3: In Particulars, write "By Stationery". In Total Payments, write ₹300. Also write ₹300 in the Stationery analysis column.
4. 4June 4: In Particulars, write "By Postage". In Total Payments, write ₹50. Also write ₹50 in the Postage analysis column.
5. 5June 5: In Particulars, write "By Office Expenses". In Total Payments, write ₹200. Also write ₹200 in the Office Expenses analysis column.
6. 6June 6: In Particulars, write "By Cartage". In Total Payments, write ₹100. Also write ₹100 in the Cartage analysis column.

Balancing the Book (End of Week):

Now, we total everything up.

• Total of the Receipts column = ₹2,000.
• Total of the Total Payments column = ₹800 (150 + 300 + 50 + 200 + 100).
• We check our analysis columns: Conveyance (150) + Stationery (300) + Postage (50) + Office Exp (200) + Cartage (100) = ₹800. The math matches perfectly!

To balance the book, we find the difference between Receipts and Total Payments: ₹2,000 (Receipts) - ₹800 (Payments) = ₹1,200 (Closing Balance).

On June 6, in the Particulars column, we write "By Balance c/d" and put ₹1,200 in the Total Payments column so both sides equal ₹2,000.

The Reimbursement: On June 7 (the start of the next week), we bring down the balance. In Particulars, we write "To Balance b/d" and put ₹1,200 in the Receipts column. Then, the Head Cashier reimburses the exact amount spent (₹800). We write "To Cash A/c" in Particulars and put ₹800 in the Receipts column. The Petty Cashier now has ₹1,200 + ₹800 = ₹2,000. The imprest float is fully restored!

Journal Entries for Petty Cash

While the Petty Cash Book is a book of original entry, it is still part of the double-entry accounting system. Here is how the journal entries work behind the scenes.

1. When the imprest fund is first created (or increased): The business is moving money from the main cash/bank to the petty cash box.

Debit: Petty Cash Account Credit: Cash / Bank Account (Being petty cash imprest established)

2. When petty expenses are incurred: No journal entry is passed at the time of individual spending. The Petty Cashier just records it in the Petty Cash Book. This is the beauty of the system—it delays the accounting work until the end of the month.

3. At the end of the month (Posting the expenses): We take the totals from the analysis columns and charge them as expenses, reducing the petty cash balance.

Debit: Postage Account Debit: Stationery Account Debit: Conveyance Account Credit: Petty Cash Account (Being petty expenses for the month recorded)

4. When the Petty Cashier is reimbursed: The Head Cashier gives cash to restore the float.

Debit: Petty Cash Account Credit: Cash / Bank Account (Being petty cash reimbursed for expenses incurred)

Advantages of the Imprest System

Why is this specific system universally taught and used?

1. 1Fraud Prevention: The Petty Cashier can never have more cash than the fixed imprest amount. If the float is ₹5,000, the maximum amount they could ever steal or lose is ₹5,000.
2. 2Automatic Auditing: To get more money, the Petty Cashier must prove how they spent the previous money. The Head Cashier audits the vouchers before handing over a single rupee of reimbursement.
3. 3Error Detection: Because the cash in the box plus the receipts in the box must always equal the imprest amount at any given moment, errors are spotted instantly. If the float is ₹5,000, and the box has ₹2,000 in cash and ₹2,500 in receipts, ₹500 is missing. The Petty Cashier is immediately accountable.

Quick Revision

• Petty Cash Book: A subsidiary book used to record small, high-volume daily expenses to prevent cluttering the main cash book.
• Petty Cashier: The junior staff member responsible for maintaining the petty cash box and book.
• Imprest System: A system where a fixed float is advanced, and at the end of the period, the exact amount spent is reimbursed to restore the original float.
• Reimbursement Rule: The amount reimbursed always equals the total expenses incurred during that period.
• Analytical Format: Features multiple columns to categorize expenses (e.g., Postage, Stationery) as they are recorded.
• Ledger Advantage: The analytical format allows periodic totals of expenses to be posted to the General Ledger, saving immense time compared to posting individual transactions.
• Cross-Checking: The sum of the "Total Payments" column must always equal the sum of all the individual "Analysis Columns".
• Vouchers: Every entry in the petty cash book must be supported by a documentary proof of payment, called a voucher, recorded by its serial number (V.N.).