Considering giving employees petty cash at your small business? Make sure you understand the petty cash meaning and create a petty cash accounting system first.
Even if you think petty cash transactions aren’t important, they must be recorded. Using small cash payments can sometimes cause a significant difference in your logs without a petty cash system. You can claim tax deductions if you keep logbooks of all your company’s expenses.
By managing petty cash effectively, companies ensure that funds are used appropriately and transactions are properly recorded. In addition to serving as an internal control against theft and fraud, a petty cash management system supports a reconciliation process for the general ledger.
Get an overview of the definition of petty cash, how petty cash works, its advantages and disadvantages, and more in this article.
What Is Petty Cash?
Petty cash funds are actual cash available for spending small expenditures without writing unnecessary checks. Petty cash is also the title of a current asset account on the general ledger that reports the company’s petty cash amount. Depending on the company, there may be between $20 and $400 in petty cash balance.
Payments made with petty cash are controlled through petty cash vouchers. When the petty cash is replenished, the general ledger expense accounts will record the expenses.
How Does Petty Cash Work
A petty cash account delivers comfort for small transactions for which giving a check or corporate credit card is inflexible or unacceptable.
Companies have different standards for what constitutes petty cash, with most keeping between $100 and $500 in their petty cash fund. Receipts are required by some companies for disbursements, while others use petty cash vouchers obtained from an office supply store.
Some companies use just a payment log to track petty cash spending, while others use a combination. The following examples of transactions require a petty cash fund:
- Office Supplies
- Customer cards
- Bouquets
- Catering a little group of workers’ lunch
- Providing reimbursement for small work-related expenses to employees
It is common for companies to implement strict internal controls to manage their funds. Usually, only a few people can approve disbursements, allowing them to approve expenses related to honest business activities. For example, a custodian is assigned to enforce petty cash regulations, request replenishment, and disburse funds.
Advantages Of Petty Cash
There are several advantages to using a petty fund. It is highly convenient for quick purchases and easy to understand and use. Some key advantages of petty cash include:
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Convenience
One of the main advantages of petty cash is its convenience. Petty cash provides a quick and easy way to make small purchases. It can save time and resources, particularly for small, everyday expenses.
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Flexibility
Petty cash funds can cover various expenses, from office supplies to travel and other small expenses. This can provide companies with flexibility in allocating their resources and help assure that employees have the resources they need to do their jobs effectively.
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Control
Having a designated petty cash custodian can help ensure that the funds are used appropriately and that there is accountability for all expenses. The petty cashier prepares the petty cash book, relieving the main cashier and allowing it to focus on other major business financial transactions, helping prevent fraud or misuse of funds and giving businesses greater control over their cash flow.
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Reduced Paperwork
Petty cash transactions typically involve less paperwork than other transactions, saving time and resources. The system systematically and properly records all minor business expenses and provides information quickly when needed. This can be particularly beneficial for small, infrequent expenses that do not justify the time and effort required to process a formal reimbursement request.
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Improved Cash Flow
By using petty cash to cover small expenses, businesses can avoid the need to write checks or make electronic payments for small amounts, which can help improve cash flow. It minimizes the number of small cash transactions, facilitating quick and easy preparation of the main cash book.
Disadvantages Of Petty Cash
Petty cash is sometimes deemed unsuitable because it is outdated and inefficient due to many reasons. Here are some of the drawbacks of petty cash:
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Inaccurate Accounting
Because there is no secondary documentation for tracking the cash in your business’s petty cash system, accounting errors can occur. You can avoid such errors by using cash vouchers to record every petty cash transaction. When reconciling your accounts, they manifest as discrepancies between your sales and cash receipts at the end of each month.
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Fraud
Keeping large amounts of petty cash in your business may also increase the likelihood of theft since it is hard to know who took it. Without proper controls, your business’s petty cash account can be vulnerable to theft by employees, and you can’t be sure who stole it. Keeping petty cash accessible to all employees opens up the possibility of theft. Keep cash in a tamper-proof safe and limit access to the account to two people only.
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Inefficiency
Managing petty cash transactions can be time-consuming and inefficient, especially for organizations with multiple petty cash funds or custodians. The Petty Cash method of accounting for small purchases is inadequate and outdated. While it may suit small businesses, it may pose a risk to large corporations.
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Overspending
When you fail to set limits on petty cash purchases, you are at risk of overspending. Setting limits, such as $100 per expenditure, for petty cash expenditures will ensure your enterprise’s petty cash expenditures are appropriate. It also necessitates a large petty cash fund, increasing the theft risk.
Petty Cash Vs. Cash On Hand
Petty cash refers to money – like coins and invoices – that a business keeps on hand for small outlays, generally because cash is more comfortable to use than checks or credit cards. In contrast, cash on hand refers to the amount of cash accessible to a business or liquid funds. You can use actual cash, such as charges you haven’t yet deposited in the bank or bills that you hold in the register to give clients change.
The difference between petty cash and cash in hand is where you are keeping the money and how you are using it. Petty cash is used for internal business costs/expenses by employees, and cash in hand is used for customer payments.
Cash on hand is an accounting term, but it can even refer to budgets in reviewing or other bank accounts, cash market funds, short-term debt devices, or other favorably liquid assets.
Tips For Managing Petty Cash Effectively
These are the four simple tips you must follow to manage petty cash and prevent losses effectively:
- Petty cash must be kept in a secure place on the premises to keep it safe. A finance team member may also be responsible for keeping the keys to the lockbox and maintaining the record of the petty cash. Accountability is improved by doing so, and the money is kept safe.
- The petty cash disbursement procedure should need receipts bound to petty cash claims. In rare cases, e.g., taxi rides, receipts will not be available; therefore, the person approving the claim should assess whether it is reasonable.
- Create a method for disbursing petty cash. The petty cash voucher should record the request and be approved by an authorized person before disbursing.
- Count petty cash on hand periodically and reconcile the cash counted to the petty cash account balance.
Example Of Petty Cash Accounting
Even though there are no predefined rules regarding expenses that would be included in this category, the definition of petty cash indicates that it may be used for incidental expenses. Consequently, small amounts of money used on the organization’s behalf will qualify.
For a better understanding of petty cash in accounting, consider the following petty cash example:
1. Company XYZ approved $150 for petty cash. The petty cash journal entry is as follows:
2. As a result, the custodian allows the cash balance to decline to $50 before replenishing. Thus, the cashier issues a check worth $100 for replenishment. Therefore, the petty cash entry is as follows:
3. According to the cashier, the petty cash fund journal entry is as follows
Thus, the amount of the petty fund has been restored to the authorized amount of $150.
Downloadable Free Petty Cash Templates
Almost every business requires employees to handle petty cash at some point, so keeping a petty cash log would be very useful. A petty cash log template is an easy way to create a format that includes columns for recording all the important financial information about petty cash transactions in any spreadsheet software such as Excel. Below are some free templates for a petty cash form you can customize for your business:
1. Petty Cash Log Template
Download Free Template
2. Petty Cash Book Template
Download Free Template
3. Statement of Cash Flow Template
Download Template
4. Petty Cash Fund Log
Download Free Template
5. Petty Cash Transaction Register
Download Free Template
6. Weekly Petty Cash Log
Download Free Template
Conclusion
Many corporations keep small cash on their premises for minor business expenses and needs—usually less than a few hundred dollars. Despite its ease of use, this petty cash account is vulnerable to theft, easy to lose track of, and prone to abuse.
Today, there are plenty of alternatives to petty cash for small payments that are safer and more convenient than the petty fund, that not only automates the posting of all journal entries associated with petty cash accounts but also handles journal entry correction.
Frequently Asked Questions
Amaey Anand is a certified accountant with over 10 years of experience in the finance industry. He has worked with various organizations to streamline their petty cash management processes and reduce inefficiencies. He has also written several articles on financial management for leading publications such as Zensuggest and The Wall Street Journal.
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