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Everything You Always Wanted To Know About Petty Cash

Written by on May 11, 2016

If you own a business or a company, there are chances that you might have set aside some petty cash to pay for minor expenses instead of writing a check to pay for such expenses.

So, what exactly is petty cash?

Also known as petty cash fund, petty cash is the small amount of cash that a business, organisation or institution sets aside for reimbursements or purchases that are too small to be subjected to rigorous reimbursement and purchase procedures.

A petty cash custodian is the person who is in charge of petty cash.

The amount of petty cash varies greatly by organisation or institution. Some organisations may just require $50 as their petty cash, while others may need $200 as their petty cash fund.

What is the purpose of the petty cash?

What's the real purpose of petty cash

When you have an adequate amount of petty cash at your disposal, then it means that you have the ability to respond quickly to any business needs that may arise.

When used properly, petty cash can be a valuable tool that can help keep your business running devoid of the rigorous task of having to write a check every time you need to pay small bills.

Therefore, the main purpose of petty cash fund is to help organisations and institutions pay for their minimally-priced business transactions.

Using petty cash to pay for such transactions is not only a cost effective way, but it can also help save time because it enables a business or organisation to respond swiftly to their business needs.

It can also be used for paying for unanticipated business expenses, especially when other alternative means of payment are neither cost effective nor feasible.

What is petty cash used for?

Ideally, petty cash fund is meant to provide organisations and businesses with enough cash to cover for their minor expenditures.

Petty cash is used for business every day needs

Here are some of the minor expenditures that petty cash can be used to cover:

  • postage,
  • taxi fares and other travel expenses costing not less than $150,
  • miscellaneous office supplies,
  • meals and refreshments during business meetings or events,
  • telephones calls made for business purposes.

There are also different types of transactions that are attributed to the petty cash. These transactions include:

  • Creation – petty cash can be created by simply drawing a check on a business’ checking account and then giving it to the petty cash custodian. The journal entry is then used for purposes of debiting the petty cash and crediting cash at bank.
  • Disbursements – individual disbursements from the petty cash aren’t recorded through a journal entry. But instead, the journal entry is then passed when it comes to replenishing the petty cash.
  • Replenishment – when petty cash becomes low, then it means that a journal entry has to be passed debiting all the expenses accounts, and then crediting the petty cash for the total sum of disbursements made. Thereafter, the petty cash fund is replenished through a check.
  • Raising fund level – once the volume of transactions that are supposed to be made from the petty cash increases, the fund level has to be raised.

Accounting for petty cash

While petty cash fund is generally a small amount of money, it, however, needs to be used prudently for it to serve the intended purpose.

Normally, the petty cash custodian is in charge of accounting for all the minor expenses that are incurred out of the petty cash.

Accounting is not that difficult for petty cash of small business

Once the petty cash custodian makes a payment from the petty cash, they are supposed to record the amount of money that has been disbursed, the name of the individual who has received the payment, as well as, the specific reason for the disbursement.

Here are some of the duties and responsibilities of a petty cash custodian:

  • replenishing the petty cash when required,
  • keeping the petty cash safe and secure,
  • keeping records of disbursements of the petty cash,
  • keeping the petty cash discrete and separate from other funds,
  • closing out the petty cash once it is no longer required.

How to account for the petty cash

While hiring a petty cash custodian can be a good step toward accounting for the petty cash, the entire responsibility of accounting for petty cash doesn’t solely belong to the petty cash custodian.

There are some simple things that you can do to ensure your petty cash is well accounted for:

1. Get a lock box

Lock box for petty cash is one of the most important part of petty cash accounting

It is important you get a lock box for storing the petty cash that is available for use. You can also use it for purposes of keeping the receipts for the transactions that have already been made from the petty cash.

However, make sure the lock box is extremely secure for purposes of deterring people who may attempt to tamper with the lock box.

2. Ensure the petty cash is sufficient and not in excess

Petty cash is not meant to be misused on unnecessary expenses, but rather to make it easier for you to pay for minor expenses without sending a lot of time and money writing and signing checks.

As such, make sure your petty cash is sufficient but not in excess. This will ensure you are using just the right amount of money to pay for your minor expenses.

3. Get a reliable petty cash custodian

Even if you have kept the petty cash fund in a secure lock box, you may, however, fail to account for it, in case you don’t have a reliable petty cash custodian to help you do that.A superman-like petty cash custodian can save you a lot of money for your business

To ensure you have an efficient petty cash custodian, it is imperative you get someone who has knowledge of accounts, or someone who has experience managing cash before.

4. Come up with a petty cash fund transaction log

It is always good to instruct the petty cash custodian to create a petty cash transaction log to help you keep abreast with the custodian.

Whenever the custodian makes a transaction out of the petty cash, they must be able to record it on the transaction log. That way, you will be able to keep up with them and also know the transaction they are making.

Conclusion

Having petty cash is the surest way of paying for minor expenses without wasting much time using other rigorous payment options.

If you don’t have one already, it is important you come up with one and you will witness the convenience that comes with having one.

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