Petty Cash: What It Is; How It’s Used and Accounted For; Examples

Unlocking the Basics of Petty Cash

When it comes to managing a company's finances, understanding the concept of petty cash is as fundamental as it is crucial. Petty cash refers to a small amount of cash on hand that is used for covering minor expenses in a business. This could range from buying office supplies to paying for postage. The key to effectively using and accounting for petty cash lies in its meticulous management. Let's delve into the intricacies of petty cash, its usage, and accounting practices, peppered with practical examples to illustrate its role in the financial tapestry of a business.

Defining Petty Cash

Petty cash is a small financial reservoir set aside for incidental expenditures that are impractical to pay for by check or credit card due to the costs and inconvenience involved. This fund is typically used for purchases that are too small to be filed through the more formal purchase processes.

Establishing a Petty Cash Fund

Setting up a petty cash fund involves determining an initial fund balance that is sufficient to cover small expenses for a set period, usually a month. The amount can vary depending on the size and needs of the business but is often between $50 and $500. Once the amount is decided, the cash is withdrawn from the company's bank account and placed in a secure lockbox or drawer.

How Petty Cash is Used

Petty cash is used in a variety of ways, including:

• Purchasing small office supplies like pens, paper, or envelopes.
• Reimbursing employees for out-of-pocket expenses such as taxi fares or coffee for a meeting.
• Paying for postage and courier services.
• Covering minor repair costs or maintenance services.

These transactions are typically low in value but are essential for the smooth operation of a business.

Accounting for Petty Cash

Accounting for petty cash is a critical aspect of financial management. It involves tracking every disbursement to prevent misuse of funds and to ensure accurate financial reporting. Here's how it's done:

• Imprest System: Most businesses use the imprest system to manage petty cash. This means that a fixed amount is maintained at all times. When the fund depletes to a certain level, it is replenished with the exact amount spent, which is verified by receipts and a petty cash voucher system.
• Vouchers: Every time money is taken from the petty cash fund, a petty cash voucher is filled out. This voucher includes the date, amount, purpose of the expense, and the signature of the person receiving the funds.
• Reconciliation: Regularly, the petty cash custodian reconciles the fund by adding up the vouchers and ensuring that the total matches the difference between the starting balance and the cash on hand.
• Replenishment: When the fund is low, the custodian submits the vouchers to the finance department, which issues a check to bring the petty cash back up to the designated amount.

Proper accounting for petty cash helps in maintaining financial control and preventing fraud or mismanagement of funds.

Real-World Examples of Petty Cash Management

Consider a small retail business that keeps a petty cash fund of $100. The manager uses $10 to pay for an emergency cleaning service after a spill, and an employee is reimbursed $15 for purchasing additional register tape when the store ran out. Each expense is recorded with a voucher, and when the fund gets down to $20, the manager requests a replenishment of $80, providing the vouchers as proof of the expenses.

In another scenario, a large corporation may have a petty cash fund of $500. The office manager uses petty cash for various small expenses throughout the month, such as buying flowers for the reception area, paying for an employee's parking while on company business, or covering the cost of snacks for a last-minute client meeting. Each expense is meticulously recorded, and at the end of the month, the fund is replenished based on the vouchers submitted.

Best Practices for Petty Cash Management

To ensure effective petty cash management, businesses should adhere to the following best practices:

• Assign a single person as the petty cash custodian to maintain accountability.
• Keep petty cash funds in a secure location with restricted access.
• Require receipts for all expenditures, no matter how small.
• Conduct regular audits of the petty cash fund to detect any irregularities.
• Set clear guidelines for what types of expenses can be paid with petty cash.

Conclusion: The Pillars of Petty Cash Proficiency

In conclusion, petty cash is a vital component of a business's financial framework, facilitating the smooth handling of minor expenses. By establishing a dedicated fund, using the imprest system, and adhering to strict accounting practices, businesses can ensure that their petty cash serves its purpose without becoming a source of financial leakage. Through real-world examples, we've seen how petty cash is used and accounted for, and by following best practices, companies can maintain control over their small yet significant expenditures. Remember, the key to petty cash management is vigilance, accountability, and precision. With these pillars of proficiency in place, petty cash can be an efficient tool in any business's financial arsenal.