What is petty cash in accounting? Petty cash, also referred to as a petty cash fund, is a small amount of funds that are kept available for companies to use for small purchases which come up from time to time in the course of business operations. That’s a long way of saying it’s “shoebox money” for expenses which are usually too small to bother using a credit card or writing a check.
Need some postage stamps? Go to the petty cash. Stapler broken? Petty cash. Reimbursing an interview candidate who needed to pay for parking? Petty cash. Pizza for the team working after-hours? Petty cash.
Petty cash funds are small, but they do need to be managed properly. You’ll want to ensure that the money isn’t mishandled, and you’ll want to make sure that those little expenses are accounted for when tax time rolls around. Here’s how you can set up an effective, easy-to-manage petty cash system.
The Advantages of a Petty Cash Fund
Keeping a certain amount of money—say $100—on hand in the form of petty cash is a good idea. A small petty cash fund:
- Limits discretionary spending and preventing small purchases from snowballing into a significant annual expense
- Allows staff members to make small, authorized purchases without filling out an expense report
- Reduces the need for managers to pay for purchases out of pocket
- Cuts down bookkeeping
- Provides a convenient source of funds
How to Set Up Petty Cash Funds
Typically, one employee is responsible for controlling petty cash funds. This person is known as the petty cash custodian. The custodian will maintain and document all expenses from the petty cash. By giving this responsibility to one custodian, it means that you will retain internal control over the money.
You can set up your petty cash float – the maximum, fixed amount of on-hand cash – by cashing a check, usually ranging from $100 to $500 depending on the size of your business. Larger companies often have a petty cash fund for each department. The amount you select for your petty cash fund must be sufficient to cover small expenses over a designated period, usually one month. You will also need to set up a petty cash account in the asset section of your financial reports.
The custodian is responsible for keeping the petty cash funds in a safe place such as a lockable box only to be accessed when needed. Even though the petty cash account is small, it needs oversight. When the custodian disburses money from the petty cash fund, he or she will write out a petty cash receipt which will be signed by the employee who is receiving the funds. The receipt will also show the amount disbursed and what the fund is being used to purchase.
Establishing Internal Controls for Petty Cash Funds
When you are setting up a petty cash system for your business, you must establish clear and concise conditions so that the funds are not misappropriated. It’s a good idea to specify what things petty cash can be used for; the petty cash policy should be in writing, and available for review by your management team and your employees. Typically, you will want to limit the number of individuals who have access to petty cash funds.
You don’t need to give every employee access to petty cash, and your petty cash custodian should be the only person permitted to disburse it. It should be up to the custodian to decide whether each expense is appropriate based on your company’s petty cash policy.
Make sure that there is a reasonable amount of money in the petty cash fund and that it is enough to meet your company’s needs. Always make sure that the custodian replenishes the fund when it is getting low – making sure, of course, that you know where and how that money has been spent.
How to Manage Petty Cash Funds
Even though the expenses running through your petty cash funds are small, they will still need to be managed properly. Tracking all of your petty cash expenses as part of your bookkeeping system ensures that all tax-deductible expenses are captured.
Managing your petty cash funds begins as soon as the first check has been cashed to create the petty cash float. For example, if you have decided on a petty cash fund for $100, your petty cash account book entry will show a debit of $100 to your petty cash fund and a credit of $100 to your bank account. Every time your custodian disburses money, he or she will fill out a receipt so that at any point in time, the total of the money and receipts in the petty cash box will add up to the initial amount of the petty cash fund.
As the balance remaining in the petty cash fund becomes too small to be of use, the custodian should tally and summarize the receipts and exchange them for a new check made out to cash to equal the total of the receipts. When the check is cashed, the funds will be added to petty cash so that its original level is restored.
If the custodian finds that the petty cash fund is too small—this is the case if the fund needs replenishing every few days—then he or she may increase the float. This would then be recorded in the petty cash accounts. On the other hand, the custodian may find that the fund amount is excessive. In this case, the surplus petty cash should be taken from the fund and deposited in the company bank account.
Petty Cash and Taxes
If this sounds like a lot of work just to maintain a $100 fund, there are good reasons for it. Typically, all or most of your petty cash purchases will be for business expenses, which means they will be deductible from your business taxes. That is why it’s important to keep a record of each expense. If you fail to document them all, you will not be able to deduct them from your business expenses for a purchase. You can find out more information about the requirements for petty cash and recordkeeping by reading IRS Publication 583.
Petty cash is a useful tool for small and medium-sized businesses as it keeps money available for small expenses. Recording those expenses helps to budget for future ones, and even though those might be small, they add up. When all disbursements are recorded diligently by the petty cash custodian and the money is replenished on a regular basis, using petty cash can be a real timesaver.
We Can Help
Of course, overseeing a petty cash fund is still going to add another layer — albeit a small one — to your accounting function. Contact us if you need help establishing a petty cash fund and its conditions.