Not every purchase a business makes warrants using a corporate credit card. Sometimes, it would just be easier to have some cash on hand for minor transactions.
That’s exactly the reason why some companies create a petty cash fund. However, organizations must establish clear controls and guidelines for how petty cash will be used and monitored to prevent abuse or misuse.
In this guide, we’ll cover what petty cash is, what it’s commonly used for, and best practices for proper management.
What is petty cash?
Petty cash definition
Petty cash refers to the small sum of money a business keeps on hand for miscellaneous expenses or incidental purchases. This cash might be kept in a safe or a locked box in the office and may be used for things like:
- Purchasing more facial tissue for the office during cold and flu season
- Running to the store to purchase treats for the staff meeting
- Buying a greeting card for a team member who is departing the company
In general, petty cash purchases tend to be of a low dollar value. Even still, small transactions can add up over time.
It’s still important for businesses to maintain complete records of all transactions, even petty cash purchases, to ensure transparency of business spending habits and support accurate financial reporting.
Types of petty cash
There are a few categories of petty cash to describe how the funds are used:
- General: Covers minor, regular expenses like office supplies
- Discretionary: Used for non-routine purchases at the manager’s discretion, like buying refreshments for a team member’s birthday
- Emergency: Designated for emergency uses or unexpected charges only, like paying for repairs when the printer breaks down
- Imprest: A set amount of cash that the company maintains and replenishes throughout the year
Advantages of a petty cash fund
There are plenty of advantages for businesses to maintain a petty cash fund.
First and foremost, it can be highly convenient to always have some cash available for minor purchases. These funds are easily accessible when the manager or an employee needs to make a small purchase without needing to go through a formal procurement, purchase request, or lengthy approval process.
Additionally, a petty cash fund also helps teams get around the employee reimbursement process. This way, workers don’t need to pay for minor expenses out of pocket and wait to be reimbursed at a later date – they can just use money directly from the petty cash fund instead.
Disadvantages of a petty cash fund
On the other hand, there are some potential drawbacks to petty cash funds that business leaders should be aware of.
For one, it can be a headache for businesses to keep track of all the receipts, change, and records of petty cash transactions. While this may be manageable for a few purchases here and there, it can quickly become convoluted and resource-intensive as the company scales.
It’s also a system that’s vulnerable to fraud and misuse. Employees using petty cash to make a purchase may not be subject to the same rigorous approval process as they would when using the company card or submitting an expense report for reimbursement.
In other words, it can be easier for rogue spending to go under the radar when using petty cash, like if an employee purchases a pack of gum for themselves when they’re out buying a new stapler for the office.
How to manage petty cash
To avoid the abuse of petty cash and ensure proper recording of these transactions, here are some expert tips and best practices on how to set up and manage this fund.
Establishing a petty cash fund
Businesses interested in setting up a petty cash fund for the first time can do so with these basic steps:
- Determine the amount: Decide how much money to allocate to the petty cash fund.
- Update the general ledger: Create a new general ledger account titled “Petty Cash” to record related transactions.
- Assign a custodian: Choose a team member to be responsible for managing and overseeing the use of the fund.
- Define policies: Establish clear policies and procedures for how the petty cash should be used, including who can access the funds, appropriate purchases, where it will be stored, etc.
- Fund the account: Withdraw cash from the company bank account in the designated amount and store it in a secure location on-site, making the appropriate journal entry.
Maintaining proper documentation
Petty cash may not be subject to the stringent internal controls that p-cards or other purchasing methods are. However, companies may still impose certain rules and requirements for how it’s used and managed.
Typically, the custodian will be responsible for providing detailed documentation supporting each use of the petty cash for internal records.
For example, every time petty cash is used, they may need to document:
- The employee’s name completing the purchase
- The date
- The amount of the purchase
- The purpose of the purchase
- The initials/signature of the authorized employee and the custodian
- The purchase receipt
Keeping detailed records helps to provide accountability for what the petty cash is used for and ensure it’s being used appropriately.
Replenishing and auditing petty cash
At a certain point, the petty cash will be running low and must be replenished so there’s enough available for future purchases.
Again, each organization will have its own procedures for handling this process. Typically, they will designate a certain dollar amount at which they’ll replenish the fund.
For example, if they typically keep $100 in petty cash, they may have a rule to replenish it once the available balance reaches $50.
The custodian can review the provided purchase receipts and completed vouchers to determine how much cash they must request to replenish the fund to its starting balance. Depending on the organization’s structure, this request may be submitted to the cashier or accounting team.
Petty cash accounting
Though seemingly inconsequential, organizations must keep track of petty cash transactions to maintain accurate accounting records and financial reporting.
Recording petty cash transactions
Accountants don’t create a journal entry each time an employee makes a purchase using petty cash.
Instead, they only make a journal entry when they disburse additional cash to the custodian upon their request.
The custodian will provide supporting documentation for the petty cash purchases in exchange for more funds. Here, the accounting team will debit the petty cash fund and credit cash for the requested amount.
Petty cash control and fraud prevention
As mentioned throughout, there should still be some policies and procedures in place to ensure that petty cash is only used for legitimate, business-related purchases.
For starters, many companies will restrict access to petty cash to just one or a few individuals. It should be kept in a locked receptacle in a secure location. Thus, not every employee will have access to this cash as they please.
It’s also crucial for the custodian to collect the necessary documentation for each purchase to verify its legitimacy. The fund should be regularly reconciled to verify that the recorded transactions match the remaining balance and that all cash is accounted for.
Petty cash example
To see what it might look like in practice for an employee to use petty cash, let’s walk through an example.
Let’s say an executive assistant at a law firm has received approval from the managing partner to purchase donuts for a staff meeting. The secretary will approach the fund custodian, like the office manager, to request $25 to make the purchase.
The custodian will verify that the request is reasonable and in line with company policies, retrieve the requested amount, and have the executive assistant sign a petty cash log to verify they’ve received the cash.
After buying donuts with the cash, the executive assistant will return with any change and the purchase receipt. They may need to offer additional information on a petty cash form or voucher to fulfill the organization’s documentation requirements. This includes some of the details we listed above, such as the date, purchase amount, purpose, etc.
The custodian will update the log and verify that the change, receipt amount, and remaining cash in the fund equal the correct balance and hold onto the supporting documentation for auditing purposes.
Manage spending and expenses with BILL
Establishing a petty cash fund is relatively simple and straightforward and gives your team an easy way to complete small purchases. Just make sure you have a system in place to log petty cash transactions to avoid fraud and misuse.
If you’re looking for an all-in-one solution for expense management where you can manage card payments, create budgets, and control spend, check out BILL Spend & Expense.
Plus, BILL also offers virtual card and company card solutions to give your business the tools it needs to complete purchases and manage transactions in one location.
Get started with your free trial of BILL today to get more control over your company’s finances.
