A guide to petty cash and handling everyday business expenses
Struggling to handle small, everyday expenses without slowing down your operations? Petty cash is a simple, effective way for businesses to cover minor costs like office supplies, quick repairs, or employee reimbursements. By managing petty cash properly, companies can avoid the hassle of formal payment processes for these small but necessary transactions. Now, let’s break down how petty cash works and why it’s essential for smooth business operations.
What is petty cash?
Petty cash is a small amount of money that a business keeps handy for quick, small expenses. Instead of going through the hassle of writing checks or using a card for tiny purchases, petty cash makes it easy to cover things like buying coffee for a team meeting or grabbing office supplies.
The main goal of having petty cash is to simplify small, everyday spending. It helps businesses avoid the time and paperwork that come with more formal payment methods. Usually, a trusted employee called a petty cash custodian, is in charge of the money. They make sure it’s used for the right reasons and keep track of how much is spent.
For daily business operations, petty cash is a lifesaver. Employees can take care of urgent, small expenses right away, without waiting for approval or going through complex procedures. This way, the business runs smoothly and doesn’t get held up by little things.
How does petty cash work?
Setting up a petty cash system
Setting up a petty cash fund is simple. First, the business decides how much money to put in the fund. This amount depends on how often small purchases are needed. A small business might start with $100 or $200, while larger companies might keep more on hand.
Next, a person is chosen to manage the petty cash, called the petty cash custodian. This person makes sure the money is being spent correctly, hands out the cash when needed, and keeps track of all transactions. It’s their job to make sure the fund is used properly and refilled when it runs low.
Tracking petty cash transactions
Once the petty cash fund is up and running, it’s important to track everything that gets spent. The custodian should keep a record of every expense, noting the date, amount, and what the money was used for. Whenever possible, receipts should be collected to back up the expenses.
Common things petty cash is used for include buying office supplies, paying for small maintenance jobs, or covering parking fees. Keeping good records makes sure the money is being used for legitimate business needs.
Replenishing the petty cash fund
When the petty cash starts to run low, it’s time to replenish it. The custodian will look at the receipts and expense logs to make sure everything adds up. The amount spent is then replaced to bring the fund back to its original level.
For example, if the business started with $200 in petty cash and $150 has been spent, the fund would be refilled with $150 to bring it back up to $200. The custodian would then hand in the receipts to the accounting team for proper record-keeping.
Common uses of petty cash in a company
Small purchases and expenses
Petty cash is great for covering small, everyday purchases that come up during business operations. These are usually small items that aren’t worth going through the usual process of writing checks or using a company card. For instance, petty cash might be used to buy pens, notebooks, or coffee for the office.
It’s also helpful for small maintenance jobs or repairs. If something breaks and needs to be fixed quickly, petty cash can cover the costs without needing a formal approval process. Plus, businesses often use petty cash to reimburse employees who pay for things like parking or subway tickets when they run errands for work.
Employee convenience
Petty cash makes life easier for employees. It lets them take care of small business needs without needing to wait for approvals or go through complicated reimbursement steps. For example, if someone needs to buy snacks for a client meeting, they can quickly grab the cash and get it done.
It’s also useful for paying small vendors on the spot. If a vendor drops off office supplies and needs payment right away, petty cash can handle that without delays in processing a payment. This quick access to cash helps keep the business running smoothly without unnecessary hold-ups.
A step-by-step guide to setting up a petty cash account
Step 1: Allocating funds for petty cash
The first step in setting up a petty cash account is deciding how much money to allocate. For smaller businesses, this might be $100 to $200, while larger businesses may need more. The amount should be based on how often petty cash will be needed and for what kinds of expenses.
For example, a small office might only need petty cash for occasional office supplies, while a larger business may need it for more frequent use.
Step 2: Selecting a petty cash custodian
Once the funds are allocated, the next step is choosing a petty cash custodian. This person will be responsible for managing the fund, keeping track of all expenses, and making sure the fund is replenished when it runs low.
Training the custodian on the company’s petty cash policies and procedures is essential to ensure they handle the money correctly.
Step 3: Establishing tracking and replenishment procedures
It’s important to create a system for tracking expenses and replenishing the petty cash fund. Each transaction should be logged, and receipts should be collected to support the purchases. When the cash is running low, the custodian will submit the receipts and request more funds to bring the account back to its original level. Following these steps, businesses can set up and maintain an efficient petty cash system.
Important tips for petty cash accounting and management
Recording petty cash in accounting systems
When it comes to keeping track of petty cash, businesses need to handle it properly in their accounting records. This means creating specific journal entries for every transaction made from the petty cash fund. For example, when the fund is set up, it’s recorded as a debit to the petty cash account and a credit to cash or bank accounts.
To keep everything balanced, businesses should also track petty cash balances regularly. This means keeping a close eye on how much money is left in the fund and ensuring that all expenses are accounted for. Regular updates to financial records help avoid confusion and make sure the petty cash fund stays in check.
Reconciling petty cash
Reconciling petty cash means making sure that the money spent matches the amount of cash left in the fund. This involves counting the cash on hand and comparing it to the receipts and records of transactions. Businesses should reconcile their petty cash fund regularly, usually at the end of each month or whenever the fund is replenished.
Steps for reconciling petty cash include counting the remaining cash, reviewing receipts, and ensuring the total matches the original amount allocated. For instance, if a business started with $200 and $150 was spent, there should be $50 left in cash.
Handling overages and shortages
Sometimes, petty cash doesn’t add up perfectly. If there’s more or less cash than expected, it’s important to investigate why. Overages or shortages can happen due to simple mistakes like misplaced receipts, incorrect amounts being handed out, or even theft.
When this happens, the custodian should review all the records carefully and identify where the error occurred. To avoid these issues in the future, businesses should have strict policies in place, like requiring receipts for every transaction and training staff on how to use petty cash responsibly.
The pros and cons of petty cash
Pros
- Convenience: Petty cash makes it easy to cover small, immediate purchases like office supplies or parking fees, saving time by avoiding formal payment processes.
- Reduces bureaucracy: For low-value transactions, petty cash eliminates the need for lengthy approval processes, simplifying minor purchases and avoiding unnecessary paperwork.
- Quick access to funds: Employees can access cash on the spot for urgent or unexpected expenses without waiting for approvals.
- Supports smooth business operations: By handling small expenses quickly, petty cash helps keep daily business tasks running without delays.
Cons
- Risk of misuse or theft: Because it’s physical cash, petty cash is more prone to theft or being used improperly if not closely monitored.
- Record-keeping challenges: Keeping accurate records can be tricky. Missing receipts or poor tracking can cause accounting issues and reconciliation problems.
- Security concerns: Since petty cash is often stored in easily accessible places, there’s always a risk of loss or theft if proper safety measures aren’t in place.
- Limited oversight: Without strict policies, it can be hard to ensure petty cash is used appropriately, leading to potential misuse.
- Inaccurate balances: Without regular reconciliation, discrepancies between cash on hand and recorded transactions can occur, making it hard to track funds properly.
Best practices for managing petty cash
Set clear policies and limits
Having a clear policy for petty cash is essential to ensure it’s used properly. A good petty cash policy outlines what types of expenses the money can be used for and sets spending limits. For example, a business might set a rule that no more than $50 can be used at once without additional approval. By setting these boundaries, businesses can avoid confusion and make sure the money is only used for legitimate business needs.
Ensure proper documentation
Every transaction made with petty cash should be documented carefully. This means keeping receipts, recording the amount spent, and noting what the purchase was for. Requiring signatures from employees when they take money from the petty cash fund is another good practice to ensure accountability. Proper documentation not only helps with tracking expenses but also makes reconciliation easier, ensuring that everything adds up when it’s time to balance the fund.
Assign a responsible custodian
Choosing the right person to manage petty cash is crucial. The petty cash custodian is responsible for handling the money, tracking transactions, and ensuring the fund is properly replenished. This person needs to be trustworthy and organized, as they play a key role in managing the fund responsibly. Training the custodian on how to handle petty cash, including when to distribute funds and how to maintain records, is an important step in keeping everything running smoothly.
Security measures for petty cash
It’s important to keep petty cash safe to avoid theft or misuse. Businesses should store their petty cash in a secure place, such as a locked drawer or a safe, to limit access to authorized personnel only.
Another good practice is to limit the amount of petty cash kept on hand to reduce risk. The smaller the amount, the less likely it is to attract theft. Regularly auditing the petty cash fund can also help catch any discrepancies early on, ensuring that the money is being handled properly and securely.
Popular alternatives to petty cash
Corporate credit cards
In some cases, using corporate credit cards can be a better alternative to petty cash. Corporate cards can be issued to employees for small purchases, allowing for easy tracking of expenses and eliminating the need for physical cash.
While they offer more control and security, corporate credit cards come with their own pros and cons. For instance, not every vendor accepts cards, and there may be restrictions on how much can be charged at once.
Digital payment options
Another alternative to petty cash is using digital payment options, like mobile payment apps. These methods offer a fast and convenient way to handle small transactions without dealing with physical cash.
Digital options are becoming increasingly popular because they offer a clear trail of all transactions, making it easier for businesses to track spending and avoid issues related to lost receipts or misplaced funds.
Final words
Petty cash is a simple yet valuable tool for handling small, everyday expenses in a business. When managed correctly, it can streamline processes and save time on minor transactions. However, it’s important to have clear policies, good documentation, and proper security in place to avoid misuse or theft. By following best practices, businesses can ensure their petty cash system runs smoothly and supports day-to-day operations without unnecessary complications. Additionally, for businesses looking to modernize, alternatives like corporate credit cards or digital payment methods offer more control and security.
FAQs
Is petty cash an asset or expense?
Petty cash is considered an asset. It’s a small amount of cash that a business holds for small, immediate expenses, but it remains part of the company’s total cash balance.
What is the main purpose of petty cash?
The main purpose of petty cash is to cover small, everyday expenses that don’t require formal payment methods. It’s used for things like office supplies, minor repairs, or quick reimbursements.
Is petty cash a journal entry?
Yes, petty cash involves journal entries. When petty cash is set up, it’s recorded as a debit to the petty cash account and a credit to the bank or cash account. Each time it’s replenished, similar entries are made.
What are the two types of petty cash?
The two common types of petty cash systems are the imprest system and the ordinary system. The imprest system requires replenishment to a fixed amount, while the ordinary system allows for more flexible replenishment.
How often should petty cash be reconciled?
Petty cash should be reconciled regularly, usually at the end of each month or when it’s replenished. This ensures the cash balance matches the receipts and helps prevent errors or misuse.
