What Is Petty Cash?
Petty cash—not to be confused with the British phrase ‘pennies from heaven’—is a small amount of money that businesses keep on hand to cover minor expenses as they come up. It typically comes in the form of cash, and unlike a company’s regular operating cash, petty cash isn’t banked, nor is it tracked in the organizations books or financials.
Tending to the petty cash is typically the responsibility of an employee or staff member, who is then accountable for keeping track of the cash and properly categorizing the costs on the organization’s internal financial reports.
What Can Petty Cash Be Used For?
Petty cash is typically used to cover small expenses, such as:
• Supplies such as pens, paper, post-it notes, and staplers
• Minor repair costs, such as plumbing services
• Moving costs such as gas
• Office snacks and beverages
• Postage fees to send mail
• Small entertainment costs, such as taking clients out to lunch
Advantages of Using Petty Cash
Petty cash is a great option for covering routine small expenses, because it:
• Provides organizations with the flexibility to make quick decisions
• Saves time since there’s no need to fill out paperwork and get the accounting department to approve the expenses
• Provides cash that can be used to cover minor emergency costs
• Makes it easier for organizations to stay cash-flow positive
• Is more convenient than carrying around a lot of small bills or coins for minor expenses
Disadvantages of Using Petty Cash
However, there can be some drawbacks to using a petty cash system, such as:
• There can be a lack of accountability, since petty cash is not tracked by the company’s accounting department
• It can be difficult to keep track of small amounts of money when it’s not in a banking system
• It can lead to misuse of funds without proper regulation
• Petty cash is often left with one employee and not shared among others who need to make purchases
How to Account for Petty Cash
When setting up an organization’s petty cash system, the basic accounting steps are:
- Establish a petty cash fund with a predetermined amount
- Create a petty cash journal to track expenses, where the cash is kept, and who can access the funds
- Create a petty cash log, which shows all the cash inflows and outflows
- Assign a manager to be in charge of the fund and check any expenses
- Have a key for the petty cash box, which is kept in a safe and not shared with anyone else
There should also be a separate envelope for each expense type. For example, if an organization uses petty cash for travel expenses, there should be an envelope labeled “Travel” where all travel receipts are kept and from which the travel expenses are deducted.
How to Reimburse the Petty Cash Fund
When a business makes purchases that require petty cash, they should issue a request to the accounting department for the reimbursement. The accounting department will then review and approve the request, and reimburse the petty cash fund.
At the end of the month, all petty cash expenses should be compared to the budgeted amount and to the actual expenses reported. Any amount that exceeds the budget amount should be withdrawn from the petty cash fund and replaced with a cashier’s check.
The petty cash fund should also be replenished with a new cashier’s check. If a business is in need of cash, they can use the petty cash fund to “float” short-term loans or to augment other cash sources.
If managed properly, a petty cash system can be a great way for organizations to manage their small expenses. It’s important to create clear guidelines for how the fund should be used, who is responsible for it, and how it should be maintained. Having one individual accountable for the petty cash fund can make it easier to identify any financial discrepancies or abuse.
All employees should be aware of their petty cash responsibilities, have access to receipts and documentation, and be accountable for the records they submit. Following financial protocols, keeping accurate records of all transactions, and refilling the fund with cashier’s checks can help organizations manage their petty cash fund effectively and with ease.
