What is Petty Cash?

There are dozens of different uses for petty cash, including office lunches, flowers, stationery, staff refreshments, small employee reimbursements, and immediate purchases. The amount of petty cash you have available will depend on the size of your company. For example, if you only spend about $100 per week on petty cash transactions, it wouldn’t make sense to hold thousands of dollars in your petty cash box.

Recording Petty Cash

Since petty cash transactions do not show up on your bank or credit card statements, you need to keep a petty cash book. Your petty cash book will contain basic information about the transaction, such as the purpose of the transaction, the date, who used the funds, and the ending balance in your petty cash box.

Then, at the end of the week or the end of the reporting period, you will manually enter these transactions into your accounting system. Failure to account for these items could lead to an overstated net income, resulting in a higher tax bill. Additionally, the ending balance of your petty cash in your office should tie to the ending balance of your petty cash bank account on your financial statements.

Petty Cash Management Best Practices

Cash is very susceptible to fraud and asset misappropriation. To avoid any fraudulent activities and properly account for all transactions, here are some best practices.

Complete Regular Petty Cash Reconciliations

At the end of your reporting period, such as monthly, you should reconcile the amount of petty cash on hand to your detailed transaction list. If you have lower cash than expected, it potentially indicates a transaction is missing from your ledger or someone took extra funds, whether intentionally or accidentally. This process is similar to completing bank and credit card reconciliations in your accounting system.

Assign Petty Cash Custodians

A petty cash custodian is in charge of monitoring cash in your office. This could be holding the key to your petty cash box or paying out petty cash transactions. Petty cash custodians are also in charge of keeping details of each transaction, including receipts. Having a defined custodian ensures that cash does not go missing and your accounting records remain accurate.

Define Eligible Petty Cash Expenses

Petty cash shouldn’t be used for every transaction. In fact, you should have a petty cash policy that defines which expenses are eligible and under what circumstances. For example, if an employee needs to get gas in their vehicle, you shouldn’t hand them cash out of your petty cash fund. Instead, ask the employee to fill up the vehicle using their own card and submit an expense reimbursement request or take a company credit card.

Set Petty Cash Transaction Limits

Bouncing off defining eligible petty cash expenses, you should define a dollar limit threshold for each petty cash transaction. Your petty cash account will not contain high levels of funds, so set a dollar amount that is reasonable, such as each transaction must be under $50. Holding too much cash increases your risk of fraud and makes it more difficult to track available funds.

Retain Petty Cash Vouchers

A petty cash voucher supports the payout of funds from your petty cash account. This could be a receipt or invoice that was paid for out of petty cash funds. These documents support your transactions in the event of an audit and serve as your double-check that all information was entered into your accounting system.

Summary

• A petty cash fund is an amount of cash held on hand for small transactions, such as a coffee run or buying postage.
• It’s important to record your petty cash transactions in your accounting software to report accurate taxable income.
• Petty cash accounts can be susceptible to fraud from employees overreporting actual expenses or taking cash directly out of the fund, making it crucial to have the right controls in place.
• Completing regular reconciliations, assigning custodians, defining eligible expenses, setting transaction limits, and retaining vouchers are all petty cash management best practices.