What is Petty Cash?

Petty Cash Definition

Petty cash is a small amount of cash kept on hand in a business for handling minor expenses. The purpose of maintaining a petty cash fund is to enable quick and convenient access to actual cash for small, incidental expenses where using other forms of payment like checks or credit cards would be impractical or inefficient. 

Petty Cash Uses

Petty cash is used for a variety of small, incidental expenses in a business setting. 

• Office Supplies: For purchasing minor items like stationery, printer paper, pens, or envelopes, especially when they are needed urgently.
• Postage and Shipping: Covering costs for postage stamps, courier services, or mailing packages.
• Minor Repairs and Maintenance: Paying for small-scale maintenance work or repairs, such as fixing a leaky faucet or replacing a broken office chair.
• Business Errands: Costs incurred during business errands, like parking fees, public transportation fares, or gas for quick trips.
• Petty Cash Reimbursement: Reimbursing employees (they need to fill out a petty cash reimbursement form) for out-of-pocket expenses that are business-related, such as buying supplies or paying for a taxi to a meeting.
• Client Hospitality: Small expenses for hosting clients or visitors, such as buying coffee, snacks, or refreshments for a meeting.
• Emergency Expenses: Handling unforeseen minor expenses that need immediate payment, like advance payroll.
• Tips and Gratuities: For services where tips are customary, such as food delivery or taxi service.
• Small-scale Events: Organizing minor office events or celebrations, like a team member's birthday or a small farewell gathering.
• Miscellaneous Expenses: Covering various other petty cash purchases that don't fit into the regular accounts payable process due to their size or urgency.

How Petty Cash Works

The petty cash procedure operates through a simple, yet effective system to manage small, routine expenses in a business. Here's a step-by-step breakdown of how it typically works:

• Setting Up the Petty Cash Fund: A designated amount is set aside to start the petty cash fund. This amount varies depending on the needs of the business. A responsible person, often referred to as the petty cash custodian, is appointed to manage the fund.
• Imprest System: Petty cash usually operates on an imprest system. This means the fund starts with a fixed amount. When the fund diminishes to a certain level, it's replenished back to the original fixed amount.
• Making Payments: When a small expense arises, an employee will take cash from the petty cash fund. This could be for expenses like office supplies, minor repairs, or small office events. In return, the employee provides a petty cash receipt or petty cash voucher detailing the expense. This voucher includes information like the date, amount, purpose of the expense, and the name of the employee.
• Recording Transactions: The petty cash custodian keeps a record of all transactions, including the vouchers and receipts. Keeping track of a petty cash expenditure is crucial for accountability and transparency.
• Replenishing the Fund: Periodically, or when the petty cash fund is low, the custodian will count the cash and add up the receipts/vouchers. The custodian then requests a check or a cash transfer for the total receipts to bring the petty cash back to its original level. The replenishment process is also documented, showing that the fund has been restored.
• Auditing: A regular financial audit is performed to ensure the petty cash fund is being managed properly. The total of the cash on hand plus the total of the receipts should always equal the original petty cash fund.

This process helps ensure that petty cash is used appropriately and that all transactions are accounted for. It's a simple yet effective way to manage small, incidental business expenses.

Petty Cash Reconciliation

Reconciling a petty cash transaction is an essential part of managing a petty cash fund. It involves verifying and updating the records to ensure that the cash on hand plus the recorded expenses equal the original fund. This process helps with accounting and detecting any discrepancies. Here's how the bank reconciliation of petty cash typically works:

• Collect Receipts and Vouchers: Gather all the receipts and vouchers that document the expenses paid out of the petty cash fund.
• Count Remaining Cash: Count the amount of cash that is currently in the petty cash box or drawer.
• Calculate Total Expenses: Add up the total expenses as recorded on the invoice and vouchers.
• Verify Total Against Original Amount: The total of the remaining cash and the expenses should equal the original amount set for the petty cash fund. For instance, if the fund started with $100, and there are $30 in expenses recorded, then there should be $70 in cash remaining.
• Identify Discrepancies: If the total doesn’t match, investigate any discrepancies. This could be because of missing receipts, recording errors, or other issues.
• Update Records: Update the petty cash ledger or record book with the latest transactions, ensuring that all expenses are accounted for.
• Replenish Petty Cash: If necessary, replenish the petty cash fund back to its original level. This is done by obtaining cash equal to the total of the recorded expenses and adding it to the fund.
• Prepare a Reconciliation Report: Prepare an accounting reconciliation report that shows the starting balance, expenses (with details), the remaining cash, and the amount replenished. After the financial reporting is done, it needs to be reviewed and approved by a supervisor or manager.
• Implement Controls: Regularly reviewing and reconciling the petty cash fund helps in identifying any patterns of misuse or errors, and proper controls can be implemented to prevent them.
• Audit: Periodic audits by an internal or external auditor can provide additional oversight and ensure that financial management is done properly. 

Benefits of Petty Cash

Petty cash offers several benefits in a business setting, particularly in managing small, routine expenses. Here are some of the key advantages:

• Convenience and Efficiency: Petty cash allows for quick and easy access to cash for small purchases, saving time and administrative effort that would be required for writing checks or processing electronic payments.
• Simplifies Small Transactions: It simplifies paying for minor expenses, avoiding the complexity and delay of formal procurement procedures for small amounts.
• Improved Cash Flow Management: By segregating small expenses, petty cash helps in better cash flow management. Larger bank accounts are not disturbed for small, everyday expenses.
• Reduces Banking Costs: Using petty cash for small expenses can reduce banking fees and transaction costs associated with writing checks or electronic transfers.
• Facilitates Immediate Payment: It provides a means to pay for goods or services, which can be especially useful in situations where immediate payment is required or credit cards are not accepted.
• Enhances Employee Convenience: It allows employees to make necessary purchases without using their own money and waiting for reimbursements.
• Easy to Track and Control: With proper documentation and regular reconciliation, petty cash provides an effective way to track and control small business expenses.
• Flexibility: Petty cash offers flexibility in situations where other payment methods might not be possible, such as when dealing with vendors who require cash or for emergency expenses.
• Aids in Budgeting: By analyzing petty cash expenses, businesses can get insights into small, recurring costs, aiding in more accurate budgeting.
• Supports Operational Needs: In certain business environments, having cash on hand is essential for smooth operations, such as in retail settings for making change.