Do you need to stop and grab donuts for this morning's staff meeting? Maybe you have an unexpected client drop by and you want to send out for bottled water or soft drinks. Small businesses handle small expenses like this by using a petty cash fund. Petty cash is useful for businesses to keep on hand whether they are just one-person proprietorships, such as a financial advisor, or all the way up to a small business with multiple divisions.
The funds in petty cash typically cover small expenses and employee reimbursements for small expenses.
What Is Petty Cash?
Petty cash is a small amount of cash kept on hand to cover small, and often unexpected, expenses that pop up during a business day. You might use money from the petty cash fund to pay for minor expenses such as postage, Uber fares, or reimburse someone $10 for bringing in a box of donuts.
A petty cash voucher or receipt is typically filled out with information on each transaction so that it can be entered into the company's accounting system and included in the company's financial statement information. Petty cash is usually operated on an "imprest" system where an employee is tasked with maintaining and keeping track of petty cash.
Why Is Petty Cash Important?
Even though the cash economy is getting smaller, there is still often a need to reimburse employees or to quickly pay a delivery driver. Petty cash serves these purposes. A petty cash fund allows a small amount of cash to be kept in a convenient place for miscellaneous expenses.
A petty cash fund gives a small business the flexibility of quickly reimbursing or paying small expenditures without having to write a company check or use a company credit card. An employee can run out to the post office, not knowing the exact amount of postage needed on an item for the mail, and take petty cash with them to pay for the expenditure.
Petty cash is important because of the convenience it affords.
When Is It Most Appropriate to Use Petty Cash?
Typically, companies keep between $30-$300 in their petty cash funds. The use of petty cash is only appropriate for small, erratic expenses that pop up unexpectedly. Even then, a petty cash fund is only appropriate if there is someone to monitor it and track the use of the money.
It is also appropriate for companies to either keep their petty cash in just one office or the main office of each division of the company. The important thing is to monitor your petty cash and keep track of it on a ledger. Therefore, it is only appropriate to keep petty cash on hand when a trusted employee can keep an eye on it.
Petty cash expenditures can add up. Therefore, it is appropriate to keep only enough petty cash available for emergency and convenience needs.
A monitoring and tracking system, with receipts, should be used for the petty cash fund.
Petty Cash vs. Cash on Hand
The term "petty cash" refers to the small cash fund a business keeps on hand to cover small emergency and unexpected expenses. The term "cash on hand" refers to all the liquid assets a business has. It includes petty cash, but it is not just that. Cash on hand refers to all the money you have in your safe and in bank accounts, including the actual bills and coins you have in your petty cash fund.
Cash on hand may also include undeposited cash you have if you have a cash register, such as in retail. You have to keep enough cash on hand to make change for customers and accept payments in cash for those customers who do not use credit or debit cards.
Setting Up Your Petty Cash Fund
Set up a petty cash fund by following these six steps:
- Add a petty cash account to your chart of accounts: Start a petty cash fund by writing a check drawn on your company to "Petty Cash." Cash the check.
- Decide on a location for your petty cash fund: The location should be in a convenient place for both the employer and employees. A logical place for a petty cash fund is in the reception area since employees may leave to run errands by passing by there.
- Decide on a trusted employee to monitor, track, and record petty cash expenses: The employee should be someone with reasonable access to the location of the petty cash. The fewer persons with access to it, the better. You should give two people access to the petty cash fund. If you have multiple petty cash funds in multiple divisions, give two people access in each division. One person should have the responsibility for replenishing the petty cash fund. The second person should have responsibility for recording the petty cash transactions into your bookkeeping system.
- Set an amount for petty cash float: Petty cash float is the initial amount of petty cash you have in your petty cash fund.
- Place the petty cash in a designated container: There can be a designated petty cash drawer, which can be locked, a locked petty cash box, or a safe. The drawer, box, or safe in which you place your petty cash should have a designated location within your office from which it should not be moved.
- Include a ledger page and an envelope for receipts with the petty cash: The custodian(s) of the petty cash should record every petty cash transaction and include a receipt. The receipts serve as the source documents for the transactions.
- Replenish the petty cash fund back to the approved amount as needed: Be sure and make your journal transactions from the source documents first.
Petty Cash Management Tips
- Replenish the petty cash fund: Take this action when you cannot get through the day with the petty cash you have on hand. Some companies keep only $30 in the fund, while others keep up to $300 or more. Choose the amount based on the expenditures you need to cover each month out of petty cash.
- Set a dollar limit on purchases that can be made from petty cash: This amount may be as small as $25 or $50.
- Institute a petty cash policy: All the details about your petty cash fund should be stated in a written petty cash policy.
- Petty cash should be on your books: Don't leave petty cash off your books. If you add Petty Cash to your Chart of Accounts, it will reflect on your books.
- Specify what you can buy with petty cash: In your petty cash policy, describe what can be purchased with petty cash and what should not be, with exceptions.