What is Petty Cash Management?
Even though we’re quickly moving towards a cashless economy, there are still times when a business needs a small amount of cash on hand. Maybe you need stamps or a couple of bottles of water from the corner store, or you need to pay the pizza delivery guy. For those small expenses, it’s just easier to handle the whole transaction using cash rather than writing a check or using the company credit card. That’s when having a petty cash fund in the office can help out.
What is a petty cash fund?
Petty cash, as the name implies, is for small expenditures that are most conveniently made using cash. This fund allows employees to be easily and quickly reimbursed for expenditures they make on behalf of the business. Most often this is for office supplies or other small expenses. Depending on the company size and the number of cash expenses, the total float in a petty cash fund might be anywhere from $100 to $500.
What is petty cash management?
A petty cash management system helps companies ensure that those funds are used appropriately. It serves as an internal control to safeguard that asset. Without a system for handling petty cash, a company can be vulnerable to theft.
Here’s a story about how that can happen. One of my CPA friends served as outsourced controller for a company when their controller suddenly quit, amid allegations of embezzlement. She found the unlocked petty cash box in his office, along with a reconciliation showing $800 of cash on hand. However, the box contained only about a dollar in change. Maybe it was the controller, maybe another employee, but that $800 was gone forever.
Managing your petty cash system ensures oversight and makes it easier to enter those business expenses in your company’s bookkeeping system. Even though the amounts passing through the petty cash fund are small, over time these small expenses can add up. Most companies don’t want to lose those deductions on their financial statements, or lose visibility into where resources are being spent.
How to set up a petty cash management system
Setting up a system to manage your petty cash handling is easy, and by the way, is a much better idea than just letting employees “borrow” money from the cash register when they need a few dollars. That rarely ends well.
Appoint someone as petty cash custodian
Only one person at a time should be given responsible for the fund. A small company may have just one petty cash fund, but larger companies may need a separate fund for each department or office. Each fund needs its own custodian. The custodian will have responsibility for disbursing the funds, keeping records of those disbursements and requesting replenishment of the fund when needed. As an added petty cash internal control, the custodian should not be the same person who also records the petty cash transactions in the general ledger.
Fund the account
To get the fund started, cash a check with an amount that seems appropriate for the size of the company and the volume of anticipated transactions. This will be your float. Many businesses start with $100. The amount should be small enough that it’s not terribly tempting for theft, but also big enough that it will be adequate for a month. If your GL doesn’t already have a Petty Cash account on the balance sheet, you’ll need to add one.
Here’s the journal entry to record the funding:
Memo: To record funding of petty cash
Secure the funds
Keep the petty cash in a locked box or in a locking drawer of a file cabinet. The designated custodian and the business owner, CFO, or controller should be the only ones who have the key.
You’ll need to create guidelines for uses of petty cash. What is the maximum amount for petty cash disbursements? Should it be $25 or $50? Do larger disbursements require approval from someone other than the custodian?
What kinds of expenses can the fund be used for? Is this limited to office supplies, cards, flowers, snacks, and meals for the office, or are there other acceptable uses?
Will you require a receipt for every purchase, or just for those above a certain amount? While it is ideal to have receipts for everything, that might not always happen.
Review these guidelines with your entire team and make sure they understand them. Make it clear this is not for personal use.
Recordkeeping is a crucial part of any petty cash management system. When an employee requests reimbursement, the custodian should enter that into a log of petty cash transactions. Some companies also use paper vouchers, which are filled out by the employee requesting the cash and kept in the box with the cash. Petty cash vouchers should include the name of the employee, the date, and amount of cash disbursed and should be signed by the employee.
The petty cash transactions log can be a paper ledger or a spreadsheet that has these columns:
This log and the receipts will be used as part of the reconciliation process.
Even though the amounts are small, this enhances internal control by serving as documentation that the funds were used appropriately. Depending on your other processes, receipts may be paper or in electronic format; just make sure you have a mechanism to capture them.
At some companies, employees are allowed to take a cash advance from petty cash, but must leave behind a signed IOU that includes the name of the employee, the amount of the advance and the purpose for the advance. After spending the cash, the employee should bring back the change and the receipt and exchange them for the IOU.
Replenish funds when low
When cash in the box gets low, cash another check to bring the cash balance back to the float. Ideally, this should be done close to month end so the amount of cash in the lockbox equals the float. This can be done as part of the reconciliation process, which we delve into more detail in this post.
It’s always a good idea to regularly review the use of petty cash to ensure the funds were used for the right things, and to let everyone in the company know that someone is keeping a close eye on this.
Record expenses in the general ledger
At some companies, the custodian brings the vouchers or receipts to the company bookkeeper at the time funds are replenished. At other companies, this is part of the regular reconciliation process. Here’s a journal entry to record expenses when the funds are replenished:
Memo: To record transactions paid with petty cash
Alternatively, the expenses can be recorded as a credit to Petty Cash. In this case, the GL balance of Petty Cash should tie to the amount of cash in the lockbox.
On a regular basis, the petty cash transactions and the amount of cash in the box need to be reconciled. We go into more detail about how to do that in our post here. How often? This depends on the volume of transactions. At a minimum, this should be done as part of the month-end close, but some companies may need to do this every week or two. Ideally, the total of petty cash vouchers or receipts + cash = float at all times.
We’re moving towards a cashless society, so keeping cash on hand for small expenses is maybe not as necessary as it used to be. Some small businesses are substituting a prepaid company debit card, which limits spending and can be monitored online. Replenishment can be done with a simple transfer from the company bank account. Plus, using a prepaid debit card makes improper usage and theft much harder. Account reconciliation software is another solution that simplifies the process of reconciliation and recordkeeping. Other companies use apps like Expensify as a means to reimburse employees for their out-of-pocket expenses.