What is Petty Cash?

Petty cash is a small amount of money that a business or organization keeps on hand for making small, day-to-day transactions. This fund is used for covering minor expenses that arise in the course of business operations, such as buying office supplies, reimbursing employees for small expenses, or making small day to day payments.

The petty cash fund is typically maintained in a physical cash form, usually stored in a secure location like a locked cash box or drawer. A designated employee, often called the petty cash custodian, is responsible for managing and disbursing the funds. When someone incurs an eligible small expense, a petty cash fund is used. They can request reimbursement from the petty cash fund by submitting a receipt or voucher detailing the expense.

How is Petty Cash Used and Accounted For

To keep the fund balanced and ensure accountability, regular reconciliations are done. This involves comparing the amount of money initially placed in the fund with the remaining cash and the sum of all the expenses reimbursed from the fund. When the petty cash fund is low in balance, it is typically replenished by reimbursing the custodian for the total expenses paid out and adding an equivalent amount of cash back into the fund.

Petty cash systems help streamline the process of handling minor expenditures and reduce administrative burden for small transactions that don't justify the use of more complex financial processes.

Petty Cash Examples

A few examples of Petty Cash are:

Office Supplies: Replenishing office supplies like pens, notepads, paper clips, and other small stationery items.

Coffee and Refreshments: Buying coffee, tea, snacks, and other refreshments for the office kitchen.

Transportation Expenses: Covering small transportation costs such as bus fares, parking fees, or tolls for employees running errands for the company.

Miscellaneous Expenses: Paying for small miscellaneous expenses like postage stamps, small repairs, or quick fix-it items.

Employee Recognition: Rewarding employees with small tokens of appreciation, such as gift cards or small items, for their contributions.

Customer Hospitality: Providing refreshments or small gifts to clients or customers during meetings or visits.

Petty Repairs: Covering minor repairs around the office, like a broken chair or a leaky faucet.

Local Travel: Funding minor travel expenses, like taking a client out for lunch or covering public transportation expenses for a business-related local trip.

Types of Petty Cash Book

There are mainly two types of Petty Cash Books:

Imprest Petty Cash Book: This is the most common type of Petty Cash Book. In the imprest system, a fixed amount of money (the "imprest amount") is established at the beginning. The petty cash custodian is given this amount to make small purchases. When the cash on hand becomes low, the custodian requests reimbursement of the exact amount spent, and the original imprest amount is restored. This method ensures that the petty cash balance remains constant, and the book is not closed at the end of each period.

Non-Imprest Petty Cash Book: In this system, there's no fixed imprest amount. The petty cash custodian records all transactions and maintains a running balance. The custodian may have to justify the expenditures periodically to replenish the cash fund. The balance in this type of petty cash book is not restored to a specific amount like in the imprest system.

Advantages and Disadvantages of Petty Cash

Advantages of Petty Cash:

Convenience

Petty cash provides a convenient way to handle small expenses without the need for complex paperwork or electronic transactions. This can save time and effort for employees and streamline the reimbursement process.

Quick Access

Petty cash allows employees to access funds immediately for small and urgent expenses, which can help maintain the smooth functioning of daily operations.

Reduced Administrative Burden

Petty cash transactions are usually simple and don't involve extensive documentation or approval processes. This reduces the administrative burden and paperwork associated with larger transactions.

Flexibility

Petty cash is used for a wide range of small expenses, such as office supplies, snacks, minor repairs, or transportation expenses. Its flexibility makes it suitable for various needs.

Controlled Spending

By limiting the amount of petty cash on hand, businesses can exercise some control over spending. This can prevent excessive spending on minor items.

Disadvantages of Petty Cash:

Risk of Mismanagement

Petty cash can be misused or mishandled if proper controls and oversight are not in place. There's a risk of theft, fraud, or improper documentation, which could lead to financial losses for the company.

Lack of Accountability

Since petty cash transactions are often informal, it can be challenging to track who spent the money, what it was spent on, and whether the expenses were legitimate. This lack of accountability can lead to misuse.

Administrative Costs

While petty cash transactions may seem simple, they can still involve administrative costs related to maintaining the cash, reconciling transactions, and ensuring proper documentation. These costs might outweigh the benefits for very small businesses.

Opportunity Cost

Keeping funds in petty cash means those funds are not being used for other potentially more productive purposes, such as investments or interest-bearing accounts.

Limited Amount

Petty cash is, by definition, a small amount of money. This limitation can be a disadvantage if there are frequent or larger minor expenses that need to be covered.

Inefficiency for Larger Expenses

For expenses beyond the scope of petty cash, using traditional payment methods like checks or electronic transfers may be more efficient and secure.

What are the requirements for a petty cash system?

Designated Fund: Allocate a specific amount of cash for fund. This amount should be determined based on the average expenses that will be covered by petty cash.

Petty Cash Custodian: Appoint a responsible individual to act as the custodian. This person will be responsible for managing and disbursing funds from the petty cash fund.

Petty Cash Policy: Develop clear guidelines and policies for how a petty cash fund should be used. This includes the types of expenses that can be reimbursed using petty cash, spending limits per transaction, and the documentation required for reimbursement.

Replenishment Process: Define a process for replenishing the petty cash fund when it gets low. This might involve submitting a request for reimbursement along with receipts and documentation to the appropriate department.

Authorized Expenses: Determine the types of expenses that can be covered by the fund. Generally, these are small, miscellaneous expenses like office supplies, postage, small travel expenses, and minor office expenses.

Receipts and Documentation: Establish a requirement for proper documentation for each petty cash expense. Receipts should be collected for every transaction and attached to a reimbursement request.

Reimbursement Process: Outline the process for requesting reimbursement from the fund. This may involve completing a reimbursement form, attaching receipts, and submitting them to the custodian or accounting department.

Record Keeping: Maintain accurate records of all petty cash transactions. This could be done manually in a petty cash ledger or using digital tools like spreadsheets.

Security Measures: Implement security measures to safeguard the fund from theft or misuse. This could include storing the funds in a secure location and restricting access to authorized personnel.

Regular Audits: Conduct periodic audits of the fund to ensure that funds are being used appropriately and all transactions are properly documented.

Accounting Integration: Ensure that the petty cash system is integrated into the company's overall accounting processes. Petty cash transactions should be reconciled with the company's financial records.

Training and Communication: Provide training to employees regarding the proper use of petty cash and the procedures for requesting reimbursements. Clear communication is essential to prevent misunderstandings.

Approval Hierarchy: Establish a hierarchy of approvals for petty cash transactions. This helps maintain control over expenses and ensures that only authorized expenses are reimbursed.

How Do You Balance Petty Cash in Accounting?

Establish a Petty Cash Fund: Initially, you need to establish a petty cash fund by withdrawing a specific amount of cash from your main bank account. This amount should be based on your organization's needs and the frequency of petty cash expenditures.

Create a Petty Cash Ledger: Maintain a petty cash ledger to record all transactions related to the fund. Each entry should include the date, description of the expense, amount spent, and the name of the person who received the cash.

Receipts and Documentation: It's crucial to ensure that every expenditure from the fund is supported by a valid receipt or documentation. This helps in maintaining accountability and accuracy.

Regular Replenishment: As the fund is used, it will be depleted. When the fund is running low (but not empty), you should replenish it back to its original amount. This involves adding more cash to the petty cash box.

Petty Cash Count: At regular intervals, such as the end of the week or month, conduct a physical count of the cash remaining in the petty cash box. Count the cash on hand, including any coins and bills.

Compare to Ledger: Compare the physical cash count with the total recorded in the petty cash ledger. If there are any discrepancies, investigate to find out if there are any errors or missing entries.

Reconciliation: Adjust the petty cash ledger to match the actual cash on hand. If there are any differences, make the necessary adjustments. If you find that there is more cash in the box than is recorded in the ledger, this is an overage. If there is less cash, it's an underage.

Recording Adjustments: Record any adjustments needed to bring the petty cash ledger balance in line with the physical cash on hand. If there's an overage, debit the petty cash account and credit an appropriate income or expense account. If there's an underage, debit an appropriate expense account and credit the petty cash account.

Audit and Approval: Petty cash transactions should be periodically reviewed and approved by a supervisor or manager to ensure accuracy and legitimacy.

Reporting: Include petty cash activity in your financial reports. This helps track the small expenses and maintain transparency in your accounting records.

What is the difference between petty cash and cash on hand?

Cash on hand refers to the total amount of physical currency and coins that a business or individual has readily available at a given point in time. This includes any cash stored in cash registers, safes, cash boxes, or other secure locations. It is a component of a business's overall cash balance, which also includes funds held in bank accounts and other liquid assets. It's necessary for making change, quick payments, and handling unexpected expenses.

In summary, petty cash is a specific type of fund designated for small, routine expenses, managed through a petty cash fund system. Cash on hand, on the other hand, refers to the total amount of physical currency a business or individual has readily available, which includes petty cash but also encompasses other cash holdings.

Why a system for Digital Petty Cash is a must?

A digital petty cash management system offers numerous benefits and holds significant importance for businesses and organizations. Here are some of the key advantages and reasons why Digital Petty Cash is a must

1. Efficiency and Accuracy:

Digital systems streamline the process of managing petty cash, reducing the time and effort spent on manual tasks like recording transactions and reconciling accounts.

Automation minimizes the risk of human error, ensuring accurate and consistent record-keeping.

2. Real-time Tracking:

Digital systems allow for real-time tracking of petty cash transactions, providing an up-to-date view of funds spent, remaining balances, and who made the transactions.

This helps prevent overspending and ensures better control over expenses.

3. Transparency and Accountability:

A digital system offers transparency by maintaining a clear trail of all transactions, making it easier to identify any discrepancies or unauthorized expenses.

Individual users can be held accountable for their spending, as their activities are recorded and traceable.

4. Security:

Digital systems often come with user authentication and access controls, ensuring that only authorized personnel can access and manage a petty fund.

The risk of physical cash theft or misplacement is minimized when transactions are digitally recorded and managed.

5. Reporting and Analysis:

Digital systems typically generate detailed reports and summaries of petty cash transactions, helping managers analyze spending patterns and make informed decisions.

These reports can be useful for budgeting, identifying trends, and optimizing expense management.

6. Audit Trail:

A digital system maintains a comprehensive audit trail, which is valuable during internal audits or external regulatory inspections.

This audit trail can help demonstrate compliance with financial regulations and internal policies.

7. Accessibility and Remote Management:

With a digital system, authorized users can manage petty cash remotely, which is especially helpful for businesses with multiple locations or remote employees.

Accessibility from different devices ensures that transactions can be recorded promptly, regardless of location.

8. Reduced Paperwork:

A digital system reduces the need for physical paperwork and manual record-keeping, contributing to a more environmentally friendly and organized workspace.

9. Integration with Other Systems:

Many digital petty cash management systems can integrate with other financial software, allowing for seamless synchronization of data and financial reporting.

10. Scalability:

Digital systems can easily accommodate changing business needs and growth, making them suitable for both small businesses and larger organizations.