The words “Petty Cash” may not mean much to you if you’re not a business owner. Petty cash is simply a fund that businesses use for small purchases. Companies use it as an informal way to keep track of expenditures and receipts from these purchases. Read to learn more.
What is Petty Cash?
Petty cash is money that a business or organization keeps on hand for minor expenses. For example, to pay for coffee, postage stamps, office supplies (paper clips, sticky notes), and snacks (such as candy bars or soda). The purpose is to avoid writing checks or making bank transfers for small transactions. The amount of money in a petty cash fund can be anything between $20-$100.
Setting up a Petty Cash fund
Before setting up your fund, you must do the following:
- Decide who will be responsible for the fund. This individual should be familiar with basic bookkeeping procedures.
- Establish a written policy to make sure all employees are aware of it.
- Determine the initial amount of money that will be in the fund.
Once you have these in place, you can set up your fund. Here’s how:
- Decide what type of container you want to use for the fund (e.g., envelope, box) and label it accordingly.
- Collect all the cash you will need to start the fund and place it in the container.
- Add a list of authorized expenditures.
- Receipts must be obtained for all transactions.
- All funds withdrawn must be accounted for.
- Make regular deposits to replenish them as needed.
When should you use Petty Cash?
You can use the fund when it would be to time-consuming (or annoying) to drive down to your bank, and you need to pay for small amounts of expenses that occur regularly.
For example, you may need to buy office supplies every week but don’t want the hassle of filling out a purchase order and submitting it with your receipt each time. Instead, you save yourself time without sacrificing security or accuracy by paying with petty cash when needed.
Another instance where you might use the fund is if an employee requires reimbursement for expenses after traveling on company business (such as cab fare). Rather than requiring them to fill out reimbursement paperwork and submit receipts before getting reimbursed, consider giving them access to the fund so they can repay themselves immediately upon returning from their trip.
Maintaining accountability over company funds without asking permission from management each time can save time.
Types of expenses you can use with Petty Cash?
The following are some examples of what they can purchase:
- Gasoline for company cars
- Postage stamps
- Cleaning supplies
- Office Supplies
- Minor repairs or replacements (light bulbs, doorknobs, etc.)
- Meals for business trips
- Hotel costs for business trips
- Travel costs for attending conferences or training sessions
- Entertainment expenses (movies, dinner, etc.) for business
- Any other small fee that is necessary for the company to function properly
Recording Petty Cash
Payees are recorded simply by the employee’s name when making payments from the fund, since they’re not paying anyone outside of the organization. You’ll want to add new accounts under the Chart of Accounts called something like “Petty Cash.”
The easiest way to record transactions is through an Excel spreadsheet. You can track payments, deposits, and the balance of your fund this way. Create a new column for each type of transaction (payment, deposit, etc.), and include the date, amount paid out/deposited, and a brief description.
If you’re not comfortable using Excel or would prefer another option, there are plenty of accounting software programs that can keep track of petty cash for you, such as QuickBooks Online and FreshBooks.
For petty cash, it’s essential to be as organized as possible. By tracking your payments and deposits in a spreadsheet or accounting software, you’ll have a clear picture of your fund’s balance and will keep track of any transactions that take place quickly.
Petty Cash Policy
Every business should have a written petty cash policy in place. It should state the rules and procedures for how the fund is to be managed, including who may spend money from the account and what types of expenses are eligible for reimbursement. The policy should also specify how often a bookkeeper or custodian should replenish the funds.
Having a formal policy helps ensure compliance with tax laws and reduces the chances of any misunderstandings or disagreements among employees. Update your policy regularly (at least once per year) to ensure it still meets your needs.
Reconciling Petty Cash
When you handle a company’s petty cash, one of your primary duties is reconciling the account. But, first, you ensure that the total amount of money on hand matches the records in the accounting system. Here’s how you do it:
- Collect all the receipts for the transactions that have taken place in the past month.
- Ensure each receipt is on hand and that the total amount matches what is in your Excel sheet or accounting system.
- If there are any discrepancies, investigate and find out why. Was a receipt accidentally missed? Or was someone trying to cook the books?
- Once everything is reconciled, you need to input the results into your Excel sheet or accounting system.
Advantages and Disadvantages of Petty Cash
Advantages:
- It helps control cash flow for the business.
- It provides a way to make small payments quickly and easily.
Disadvantages:
- Petty cash makes it easy to lose track of how much money you have available for use or spend on unnecessary things.
- Lacks strict controls, which can lead to loss or theft by employees.
- Some unexpected expenses may not be allowed under petty cash rules.
Establishing Internal Controls for Petty Cash Funds
An essential step in managing petty cash funds is establishing internal controls. Internal controls help prevent misuse and ensure that your business accounts for its spending. First, designate a custodian responsible for maintaining all records of each transaction made with the funds.
The next step would establish procedures for how employees must request expenditures from the fund and what documentation they need to provide when making purchases or withdrawals. Finally, you need to ensure employees are responsible if they do not follow the proper procedures.
Establishing accounting controls over expenditures is also very important. For example, require your bookkeeper or accountant to regularly reconcile transactions with receipts kept by the custodian.
Petty Cash and Taxes
The Internal Revenue Service (IRS) defines petty cash as “an amount of money set aside to be used for making change for a customer or paying small expenses, typically $20 or less”.
However, the IRS allows any business with a qualified account (i.e., checking or savings) to establish their own rules for what petty cash is so long as it meets specific standards, i.e.:
- Only one person should have responsibility for operating the fund;
- Receipts must be required when reimbursing an employee;
- All transactions need to be recorded; and
- No interest accrues on amounts kept in this fund.
During tax time, the IRS considers petty cash a taxable asset. A taxable asset means that the business must report the fund’s total value on its annual return and any income or expenses associated with the use of the funds. So, for example, if you reimburse an employee for $50 worth of supplies, the business would record both a debit and credit transaction and report this amount of income on its tax return.
Since petty cash is a taxable asset, businesses need to keep accurate records of all transactions that occur within the fund. It helps ensure compliance with tax laws and makes it easier to track the overall health of the fund’s account.
A Better Solution for Petty Cash
Instead of using petty cash, you can use employee cards.
- Employee cards are easy to use.
- Employee cards offer more convenience.
- The funds you load on your employee card never expire.
- Employee cards can be used anytime, unlike petty cash.
- You can use your employee card to make online or in-store purchases.
- Keeping track of employee card purchases is easy.
If you’re considering using petty cash in your company, make sure it’s an option for all employees. It should set petty at a maximum limit and not exceed $100. Be mindful about how much money they leave every day; if one employee has control of the account, they may embezzle funds with no one noticing until too late. Keep records of who spends what to prevent misuse or theft–and have another person periodically review these logs with you to ensure accountability.
Finally, try using alternatives like digital payment methods or PayPal instead-they’ll save you time when making purchases while also eliminating any issues with physical currency being lost or stolen.
