Petty Cash

Introduction

Petty cash is a small amount of discretionary funds in the form of cash that is used for expenditures where it is not practical to make disbursements by check. The term “petty” signifies that these are funds that are relatively minor but necessary for the smooth functioning of day-to-day business operations.

Definition of Petty Cash

Petty cash is generally a small amount of money kept on hand for minor business expenses. These expenses could include payments for postage, office supplies, or other small, often unforeseen expenses that crop up during the day.

Purpose and Importance

The purpose of having petty cash is to avoid the paperwork involved in writing checks for transactions involving small amounts and to provide immediate accessibility to funds for minor purchases. The proper management of petty cash ensures accurate financial records and accountability within the organization.

Usage of Petty Cash

Common Expenses

• Office supplies: Such as pens, notepads, or toners that run out unexpectedly.
• Postage: For mailing documents and small packages.
• Snacks and refreshments: Courtesies for in-house meetings or visitors.
• Transport and parking: Quick disbursements for local travel.
• Emergency repairs: Small-scale repair work like fixing a door handle.

Operation and Workflow

1. Establishing the Fund: A fixed amount of cash is allocated to the petty cash fund from the main bank account, typically managed by an assigned petty cash custodian.
2. Disbursement: When a minor expense is incurred, money is taken from the petty cash fund and a voucher or receipt is completed for the withdrawal.
3. Replenishment: When the petty cash fund runs low, a reimbursement check is issued, replenishing the fund to its original amount.

Example Workflow

1. Step 1: Allocate $500 as the original petty cash fund.
2. Step 2: Employee A spends $10 on office supplies; they fill out a petty cash voucher and attach the receipt.
3. Step 3: Custodian records the transaction and the fund now has $490.
4. Step 4: Once the fund reaches around $100, request replenishment.
5. Step 5: Issue a reimbursement check for $400 to bring the fund back to $500.

Accounting for Petty Cash

Initial Setup

When establishing a petty cash fund, an initial journal entry debits the Petty Cash account and credits the Cash account.

[Debit](../d/debit.html): Petty Cash $500
[Credit](../c/credit.html): Cash $500

Expense Records

Each expense transaction needs to be properly recorded with a petty cash voucher and receipt.

Replenishment

When replenishing the fund, summarize all petty cash expenses and write a check to the custodian to equal the total amount spent.

Example journal entries when replenishing:

[Debit](../d/debit.html): Office Supplies $10
[Debit](../d/debit.html): Travel [Expense](../e/expense.html) $30
[Debit](../d/debit.html): Miscellaneous [Expense](../e/expense.html) $20
[Credit](../c/credit.html): Cash $60

Closing

To close petty cash at the end of a fiscal period, transfer petty cash balance back to the main Cash account.

[Debit](../d/debit.html): Cash $500
[Credit](../c/credit.html): Petty Cash $500

Internal Controls

Effective internal controls are essential for managing a petty cash fund, and can include:

• Limiting the amount of money in the fund to a minimal necessary amount, generally $100-$500.
• Assigning a custodian responsible for managing, disbursing, and reconciling the fund.
• Requiring supporting documentation (vouchers, receipts) for all payments made from the fund.
• Conducting regular audits of the petty cash fund by someone independent of the custodian.

Technology and Modern Solutions

Digital Petty Cash Management

To address potential inefficiencies and risks associated with manual petty cash management, many companies are turning to digital solutions. These systems provide an electronic method to manage petty cash transactions and include features such as:

• Automated transaction logging.
• Digital receipt capture and storage.
• Real-time tracking and reporting.
• Enhanced security and compliance measures.

Example

Spendesk is a software that offers a comprehensive suite of tools for business expense management, including petty cash Spendesk. Their platform allows for easy expense tracking, digitizing receipts, and better control over small cash expenditures.

Conclusion

While often perceived as a minor aspect of financial management, petty cash plays a critical role in ensuring the smooth operation of day-to-day business activities. Proper accounting, stringent internal controls, and the adoption of modern digital solutions can make petty cash management more efficient, transparent, and secure.

By establishing clear procedures and leveraging technology, businesses can mitigate risks associated with petty cash and ensure more accurate financial reporting.