Petty cash is a small amount of funds kept on hand for businesses to pay for minor expenses and employee reimbursements. These often include items such as office supplies, coffee, snacks, gas, and other incidental expenses. It serves as an effective alternative to writing checks or using company credit cards for small purchases, ultimately saving time and effort for the company.
Establishing a petty cash fund involves choosing a designated custodian, who is responsible for managing the transactions and keeping records for accounting purposes. Proper management of petty cash ensures the careful monitoring and control of expenditures, regular replenishment of funds, and accurate reporting on financial statements.
Key Takeaways
- Petty cash is used by businesses to cover minor expenses and employee reimbursements
- Proper management involves designated custodians, accurate record-keeping, and regular replenishment
- Petty cash accounting ensures transparency and control over small company expenditures
Essentials of Petty Cash
Understanding Petty Cash Fund
A petty cash fund is a small amount of cash kept on hand by a company to cover minor and unexpected expenses, allowing for quick transactions without the need for issuing checks or completing expense reports for small amounts. A designated employee, known as the custodian, is responsible for managing and safeguarding this fund. Establishing a clear petty cash policy helps set the purpose and use of the petty cash fund, and lists allowable expenses.
Some common uses for petty cash include:
- Office supplies
- Postage stamps
- Small team lunch or refreshments
- Minor repairs or maintenance
Setting Up a Petty Cash System
To set up a petty cash system, follow these steps:
- Determine fund amount: Decide on the appropriate amount to be allocated for the petty cash fund, based on the company’s needs and size.
- Select a custodian: Appoint a trustworthy employee to manage the petty cash fund and ensure its security.
- Create a petty cash account: Record the initial fund amount in the company’s general ledger as a debit to petty cash and a credit to the cash account.
- Establish a policy: Define a clear policy outlining the purpose, allowed expenses, spending limits, documentation requirements (e.g., receipts), and reimbursement procedures.
- Implement the imprest system: The imprest system is a method where the custodian replenishes the fund to the agreed-upon amount at regular intervals or when it reaches a predetermined low point, providing accountability and control over the fund.
By understanding the purpose of a petty cash fund and setting up a system to manage it effectively, companies can streamline their financial processes and ensure that minor expenses are accounted for efficiently and accurately.
Managing Petty Cash Transactions
Issuing Petty Cash Vouchers
When managing petty cash transactions, the first step is to issue a petty cash voucher. A petty cash voucher serves as a record of small cash expenditures, and provides a process for tracking and documenting petty cash payments. The petty cashier should hand out these vouchers whenever an employee requires funds for a small expense.
Typically, a petty cash voucher should include the following information:
- Date: The date when the voucher is issued.
- Amount: The amount of cash given to the employee.
- Recipient: Name of the employee who receives the cash.
- Purpose: A brief description of the expense.
- Authorized by: Signature of the person approving the cash disbursement.
- Signature of the recipient: The employee’s signature acknowledging receipt of the cash.
To maintain accurate records, be sure to collect original receipts for each expenditure. Receipts should be attached to the corresponding petty cash voucher and filed for future review and reconciliation.
Recording Petty Cash Expenditures
Properly recording petty cash transactions is essential for maintaining accurate accounting records. Follow these steps to record your organization’s petty cash expenditures:
- Create a log: Maintain a petty cash log that records all of the transactions made to and from petty cash. The log should detail the information found on the voucher, such as the date, amount, recipient, purpose, and signatures.
- Regular review: Periodically review the log to ensure that all petty cash transactions have been accurately recorded and receipts are attached to their respective vouchers. This process helps to prevent errors and ensure accountability.
- Reconciliation: At regular intervals, such as at the end of each month, conduct a reconciliation to ensure the balance of the petty cash fund is accurate. To do this, count the remaining cash in the petty cash box and compare it to the expected balance after considering all recorded transactions. If necessary, make any adjustments to correct discrepancies.
- Replenishment: When the petty cash fund reaches a predetermined low threshold, replenish the fund by writing a check or withdrawing funds from the company’s bank account. Record this transaction in the main accounting system as a debit to petty cash and a credit to the appropriate expense accounts.
By following these best practices, you can effectively manage your organization’s petty cash transactions while maintaining accurate records and promoting transparency.
Petty Cash Accounting
Petty cash is a small amount of cash that is kept on the company premises to pay for minor cash needs such as office supplies, cards, flowers, and so forth. It is an effective way to keep minor items from bogging down the accounts payable system.
Tracking in the General Ledger
In order to properly account for petty cash expenditures, they should be recorded in the general ledger. This can be done using journal entries. When a petty cash fund is established, a journal entry is made to debit the petty cash account and credit the cash account. This essentially transfers the funds from the main cash account to the petty cash account.
When petty cash is used for expenses, it is essential to record the transactions in the general ledger. For example, if petty cash is used for postage expenses, a journal entry would be made to debit the postage expense account and credit the petty cash account. This reduces the balance in the petty cash account to reflect the expenditure.
- Establishing Petty Cash Fund: Debit Petty Cash account, Credit Cash account
- Recording Petty Cash Expenses: Debit Expense account, Credit Petty Cash account
Reconciling Petty Cash Accounts
Reconciling petty cash accounts involves comparing the remaining balance in the petty cash account with the actual cash on hand. Since petty cash is used for small expenses, it is important to reconcile the account periodically to ensure accuracy. To do this:
- Count the actual cash on hand.
- Compare the cash amount with the remaining balance in the petty cash account in the general ledger.
- Investigate any discrepancies and correct them as necessary using journal entries.
- If the petty cash fund needs to be replenished, record a journal entry to transfer funds from the main cash account to the petty cash account.
The reconciliation process helps maintain accurate records of petty cash transactions and allows for easier tracking of expenses. By properly managing and accounting for petty cash, businesses can ensure that their accounting systems remain organized and streamlined.
Petty Cash Custodianship
Roles and Responsibilities
A petty cash custodian is a person responsible for managing and distributing cash within an organization from a petty cash fund. They have a critical role in overseeing the proper usage and accounting of these funds. Their primary responsibilities include:
- Distributing cash for minor expenses as needed
- Collecting receipts for all purchases or uses of funds
- Ensuring accurate documentation and record-keeping
- Replenishing the petty cash fund when necessary
- Adhering to internal controls to minimize the risk of theft or fraud
The custodian should be vigilant and have a proper understanding of the company’s policies and procedures regarding petty cash funds, as they play a significant role in maintaining financial integrity within the organization.
Petty Cash Security Measures
Security is a vital aspect of petty cash custodianship. By implementing robust internal controls and security measures, organizations can protect their funds and minimize the risk of theft or fraud. Here are some recommended security measures for petty cash management:
- Lockbox: Store petty cash in a secure lockbox or drawer that can only be accessed by authorized personnel, including the petty cash custodian.
- Limited access: Limit the number of people who have access to the petty cash fund. Restricting access reduces the risk of unauthorized transactions or misuse of funds.
- Clear guidelines: Establish clear guidelines for the usage of petty cash, including approved expense categories and spending limits.
- Documentation: Require thorough documentation for every transaction, ensuring that all spending is accounted for and justified.
- Reconciliation: Periodically reconcile the petty cash account with transaction records to detect any discrepancies or potential fraud.
- Regular audits: Conduct regular audits on petty cash funds to assess compliance with internal controls and identify possible issues.
By incorporating these security measures and fostering proper petty cash custodianship, an organization can maintain both financial stability and overall efficiency.
Thefts, Shortages, and Errors
Detecting and Preventing Theft
To mitigate the risk of theft, fraud, and other errors in a petty cash system, implementing strong internal controls is crucial. One effective method is segregating duties, which involves assigning different tasks, such as disbursing cash and reconciling balances, to separate individuals. This way, it becomes more difficult for a single person to commit fraud without being detected. Periodic audits and independent reviews of petty cash transactions can further enhance the monitoring process.
Another strategy is ensuring that petty cash disbursements are made for legitimate purposes, with proper documentation and approval. It is essential to maintain accurate records, as this makes it easier to trace any discrepancies. Proper documentation, like receipts and vouchers, should be required for all disbursements to create a permanent record and establish transparency.
Handling Shortages and Overages
Occasionally, petty cash funds may experience shortages or overages due to errors or thefts. In such cases, it is necessary to identify the cause and rectify it promptly. When discrepancies are found, the following steps can be taken:
- Recount the cash: Verify the actual cash amount in the petty cash box against the recorded balance – differences may occur due to simple counting errors.
- Examine the documentation: Check the receipts and vouchers to ensure that they match the recorded transactions. Look out for any missing, duplicate, or suspicious entries.
- Adjust the journal entry: When replenishing the petty cash fund, record the shortage or overage in a separate account such as “Cash Short (Over).” For example, if there is a $5 shortage, debit the “Cash Short (Over)” account and credit the “Petty Cash” account by $5.
By exercising vigilance and implementing robust internal controls, businesses can effectively manage petty cash funds and minimize the likelihood of theft, shortages, and errors.
Replenishing Petty Cash
Procedures for Petty Cash Replenishment
Replenishing the petty cash fund involves the petty cash custodian requesting and receiving cash from the company’s regular checking account to return the cash on hand to the initial imprest amount. This process typically occurs when the funds in the petty cash box have been mostly spent, and it is essential to maintain smooth business operations. Below are the steps generally taken to replenish petty cash:
- Determine the amount needed: Calculate the difference between the current petty cash balance and the original imprest amount to identify the amount required for replenishment.
- Prepare a petty cash summary: List down all disbursements made from the petty cash fund and categorize them by expense type (e.g., office supplies, postage, etc.).
- Record journal entry: Create a journal entry to record the replenishment, crediting the checking account and debiting each of the expense categories.
- Issue a check: Write a check from the company’s checking account to the petty cash fund for the determined replenishment amount.
- Deposit the check: The petty cash custodian deposits the check into the petty cash box, restoring the balance to the original imprest amount.
- Reconcile the petty cash fund: After replenishment, verify that the balance shown in the petty cash ledger matches the actual cash in the box.
Employee Reimbursements
Employee reimbursements for small expenses incurred on behalf of the company are typically managed using the petty cash system. Employees may be reimbursed for expenses such as office supplies, travel expenses, or postage fees. To reimburse employee expenses through petty cash, follow these steps:
- Document the expenditure: The employee must retain the receipt or other supporting document of the purchase.
- Submit the receipt: The employee submits the receipt and a completed reimbursement request form to the petty cash custodian.
- Review the request: The petty cash custodian examines the receipt and form for compliance with company policies, ensuring the expense was necessary and authorized.
- Approve and process reimbursement: If the expense is approved, the petty cash custodian reimburses the employee from the petty cash box and records the transaction in the petty cash ledger.
By maintaining a clear and organized petty cash system, businesses can effectively manage small expenses and employee reimbursements, ensuring that necessary funds are readily available.
Petty Cash Reporting
Regular Reporting Procedures
Petty cash reporting is an essential process in maintaining an accurate and up-to-date record of a company’s financial transactions. It involves keeping track of all deposits and withdrawals from the petty cash fund and ensuring that each transaction is accounted for.
A petty cash log is used to record this information, including the date of purchase, a short description of the expense, the account to be charged, the person receiving the funds, and the person authorizing the transaction. The petty cash custodian is responsible for maintaining the log and ensuring that all transactions are recorded accurately.
It is important to reconcile the petty cash fund on a regular basis, typically monthly or quarterly, depending on the company’s policies. During the reconciliation process, the following steps should be followed:
- Count the cash balance in the petty cash fund.
- Compare the cash balance to the log of transactions.
- Identify any discrepancies and investigate as necessary.
- Prepare a petty cash journal entry to record all the expenses incurred.
- Refill the petty cash fund to its original designated amount.
Inclusion in Financial Statements
While petty cash transactions are often small, they must still be included in the company’s financial statements to provide a comprehensive view of the organization’s financial activities. Financial statements typically include the balance sheet, income statement, and cash flow statement.
In the balance sheet, petty cash is considered a current asset, as it is expected to be used within a short period of time. The ending balance of the petty cash account should be reported under the “current assets” section.
In the income statement, the expenses related to petty cash are included in various expense categories depending on their nature. For example, office supplies purchased with petty cash would be recorded under “office expenses.”
The cash flow statement reports on the movement of cash between the various accounts, including petty cash. When petty cash is refilled, this will be recorded under the “cash flows from operating activities” section as a decrease in cash, while payments from the petty cash account will be recorded as cash outflows.
In conclusion, accurate and timely petty cash reporting is essential for maintaining up-to-date books and ensuring all transactions are properly accounted for in the company’s financial statements.
Digital Solutions for Petty Cash
Accounting Software for Managing Petty Cash
In today’s digital era, many businesses are seeking accounting software solutions to revolutionize their petty cash management systems. Such software not only simplifies bookkeeping but also reduces the risk of human errors.
One example is MYNDSpendX, a user-friendly digital solution that addresses the challenges of traditional petty cash management. This tool streamlines the entire process while ensuring comprehensive tracking of spends.
Another popular option is QuickBooks, which provides features for managing petty cash accounts with ease. With its advanced reporting capabilities, QuickBooks makes it simpler to monitor and reconcile petty cash expenses across the organization.
Key advantages of using accounting software for petty cash management include:
- Improved tracking of expenses and receipts
- Enhanced visibility on company spending
- Faster month-end closing
- Mitigation of cash leakage
Transitioning to Electronic Systems
Businesses looking to transition from manual petty cash management to electronic systems can benefit from digital platforms that facilitate smoother cash management. For example, Tende Pay is a digital solution that enables decision-makers to have a 360-degree view of their operations, reducing traditional challenges faced by Kenyan businesses.
On the other hand, Finly Petty Cash Management is an all-in-one digital solution that automates and tracks utility payments while preventing cash leakage across multiple branches or outlets.
When transitioning to electronic systems, a clear roadmap is essential. Employ the following steps:
- Identify appropriate software: Choose a system that caters to your organization’s specific needs.
- Implement the system: Gradually integrate the chosen software into your financial workflow.
- Training: Ensure all staff members are well-versed with the new system to guarantee seamless operations.
- Monitor and optimize: Regularly review the system’s performance and make necessary improvements.
Transitioning to digital solutions for petty cash management has numerous benefits, such as increased efficiency, improved tracking, and reduced manual entry errors. As a result, businesses can focus on optimizing their operations and achieving growth.
Frequently Asked Questions
How is petty cash recorded in accounting?
Petty cash is recorded in accounting by maintaining a petty cash log that includes the date, amount, purpose, and recipient of each transaction. The petty cash account is typically replenished periodically by recording a journal entry that debits the individual expense accounts and credits the petty cash account.
What constitutes a typical petty cash transaction?
A typical petty cash transaction involves small, incidental expenses that arise in the daily operations of a business. These can include items such as office supplies, postage, coffee, or employee reimbursements for small purchases. The amounts usually do not exceed a predetermined limit set by the company.
What are the best practices for managing a petty cash fund?
Best practices for managing a petty cash fund include:
- Establishing a set amount for the fund and replenishing it as needed.
- Assigning a designated custodian to manage the petty cash transactions and safeguard the funds.
- Implementing a clear system for tracking and recording petty cash transactions, including dates, amounts, purposes, and recipients.
- Ensuring that all employees are aware of the petty cash procedures and limits.
- Conducting regular audits and reconciliations to maintain the accuracy and integrity of the petty cash system.
How does one reconcile a petty cash account?
Reconciliation of a petty cash account involves comparing the remaining cash balance with the total recorded transactions in the petty cash log. Discrepancies should be investigated, and corrective actions should be taken if needed. This reconciliation process helps maintain the accuracy and integrity of the petty cash system and ensures that the fund is used appropriately.
What types of expenses are appropriate for petty cash usage?
Expenses appropriate for petty cash usage generally include small, incidental, and unexpected expenses that arise during the normal course of business operations. These might consist of office supplies, postage, refreshments, or employee reimbursements for minor purchases. It is crucial to set a limit on the transaction size to ensure petty cash funds are not used for significant expenses or repeated purchases.
How is a petty cash voucher properly filled out?
A petty cash voucher is a document that records each petty cash transaction. To properly fill out a petty cash voucher, include the following information:
- Date of the transaction.
- Description of the expense or purchase.
- Amount of money disbursed.
- Receipt or documentation supporting the transaction, if available.
- Name and signature of the petty cash custodian.
- Name and signature of the person receiving the funds, acknowledging receipt.
Filling out a petty cash voucher allows for clear documentation and tracking of each transaction, ensuring proper use and accountability of the petty cash fund.
