What is Petty Cash Book System?

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Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

The Petty Cash Book System is a simple accounting method used to record small, day-to-day cash expenses that are too minor to be recorded in the main cash book. It helps manage and track small payments efficiently, like buying chai for guests or stationery for the office.

Simple Example

Quick Example

Imagine your school canteen manager needs to buy small items like extra napkins, a few pens, or some sugar for tea. Instead of writing a big cheque for each tiny purchase, they keep a small amount of cash, called 'petty cash', and record all these small expenses in a special notebook – that's the Petty Cash Book.

Worked Example

Step-by-Step

Let's say a company starts with Rs. 500 as petty cash on April 1st. They use an 'Imprest System'.

1. On April 1st, the main cashier gives Rs. 500 to the petty cashier.
---2. On April 3rd, the petty cashier pays Rs. 50 for chai for visitors. They record 'Chai - Rs. 50' in the petty cash book.
---3. On April 5th, they pay Rs. 100 for bus fare for an office errand. They record 'Bus Fare - Rs. 100'.
---4. On April 8th, they pay Rs. 70 for buying a stapler. They record 'Stationery - Rs. 70'.
---5. By April 10th, the total expenses are Rs. 50 + Rs. 100 + Rs. 70 = Rs. 220.
---6. The balance remaining is Rs. 500 - Rs. 220 = Rs. 280.
---7. To restore the fund to its original Rs. 500 (imprest amount), the main cashier reimburses Rs. 220 (the amount spent) to the petty cashier.
---8. Now, the petty cash again has Rs. 280 (balance) + Rs. 220 (reimbursement) = Rs. 500. This cycle continues.

Answer: The petty cash fund is restored to Rs. 500 after spending Rs. 220.

Why It Matters

Understanding petty cash helps in managing small finances, crucial for any business, big or small. This skill is vital for careers in FinTech, where accurate transaction tracking is key, or even in managing budgets for a startup in EVs or Biotechnology, ensuring every rupee is accounted for. It's a foundational skill for aspiring economists and engineers too.

Common Mistakes

MISTAKE: Not recording every small expense, thinking it's too minor. | CORRECTION: Every single expense, no matter how small (e.g., Rs. 5 for a pen), must be recorded in the petty cash book for accurate accounting.

MISTAKE: Mixing personal expenses with petty cash expenses. | CORRECTION: Petty cash is strictly for business or official expenses. Personal expenses should never be paid from or recorded in the petty cash book.

MISTAKE: Not getting receipts or vouchers for petty cash payments. | CORRECTION: Always try to get a receipt or prepare a voucher for every petty cash payment. This acts as proof and helps in auditing.

Practice Questions

Try It Yourself

QUESTION: A petty cash fund starts with Rs. 1000. Expenses for the week are: Rs. 120 for courier, Rs. 80 for refreshment, Rs. 50 for bus fare. How much cash is left at the end of the week? | ANSWER: Rs. 1000 - (Rs. 120 + Rs. 80 + Rs. 50) = Rs. 1000 - Rs. 250 = Rs. 750

QUESTION: If a petty cash fund operates on an imprest system of Rs. 2000 and the petty cashier spent Rs. 450, Rs. 210, and Rs. 340 in a month, how much will the main cashier reimburse to restore the fund? | ANSWER: Total spent = Rs. 450 + Rs. 210 + Rs. 340 = Rs. 1000. The main cashier will reimburse Rs. 1000 to restore the fund to Rs. 2000.

QUESTION: A petty cash fund has an imprest amount of Rs. 700. On Monday, Rs. 100 was spent on stationery. On Tuesday, Rs. 50 was spent on postages. On Wednesday, Rs. 200 was spent on office supplies. If the main cashier reimburses the fund on Thursday, what will be the balance in the petty cash book *before* reimbursement on Thursday morning, and *after* reimbursement? | ANSWER: Balance before reimbursement = Rs. 700 - (Rs. 100 + Rs. 50 + Rs. 200) = Rs. 700 - Rs. 350 = Rs. 350. Balance after reimbursement = Rs. 350 (current balance) + Rs. 350 (reimbursement) = Rs. 700.

MCQ

Quick Quiz

What is the primary purpose of maintaining a Petty Cash Book?

To record all major financial transactions of a business.

To track and manage small, day-to-day cash expenses efficiently.

To calculate the profit and loss of a company.

To manage employee salaries and wages.

The Correct Answer Is:

The Petty Cash Book is specifically designed for recording small, routine cash payments, making it easier to manage minor expenses without cluttering the main accounts. Options A, C, and D describe functions of other accounting books or processes.

Real World Connection

In the Real World

Think about a small kirana store in your neighbourhood. They often have small expenses like buying polythene bags, giving change, or paying for a local delivery. Instead of using their main bank account for these, they keep a small cash box and a simple notebook to record these daily, minor transactions. This is essentially a petty cash system in action, helping them manage their daily cash flow smoothly.

Key Vocabulary

Key Terms

Petty Cash: A small amount of cash kept on hand for minor expenses. | Imprest System: A system where a fixed amount of petty cash is given, and the amount spent is reimbursed to restore the fund to its original level. | Voucher: A document providing proof of a transaction. | Reimbursement: The act of repaying an amount that has been spent.

What's Next

What to Learn Next

Now that you understand petty cash, explore the 'Main Cash Book' and 'Bank Reconciliation Statement'. These concepts will show you how larger transactions are recorded and how cash balances are matched with bank records, building on your foundational knowledge of cash management.