Every business incurs minor expenses that wouldn't justify writing a check or using a company credit card. This is where petty cash comes in. A petty cash fund is a small amount of money set aside to cover these day-to-day purchases. But simply having a stash of cash isn't enough. To maintain financial accountability and ensure proper recordkeeping, you need a solid petty cash accounting system.

What is Petty Cash?

Petty cash refers to a designated pool of cash used for minor business expenditures. The amount in the fund typically ranges from $100 to $500, depending on the business's needs. Common petty cash purchases include office supplies, postage stamps, coffee for the break room, or reimbursing employees for small work-related expenses.

Benefits of a Petty Cash System

• Convenience: Petty cash allows for quick and easy handling of small transactions without the need for cumbersome paperwork.
• Efficiency: It saves time and resources compared to processing checks or credit card transactions for minimal amounts.
• Employee Reimbursement: Petty cash simplifies the reimbursement process for employees who pay for work-related expenses out of pocket.
• Internal Controls: A well-managed petty cash system promotes accountability and helps prevent misuse of company funds.

Setting Up Your Petty Cash System

Here are the key steps for establishing a functional petty cash accounting system:

1. Define the Fund Amount: Determine a reasonable amount for your petty cash fund based on your average monthly petty cash needs.
2. Assign a Custodian: Designate a responsible employee as the custodian, accountable for managing the petty cash fund.
3. Establish Procedures: Create clear guidelines outlining who can access petty cash, allowable expense categories, and the required documentation for reimbursement.
4. Secure Storage: Utilize a locked petty cash box or drawer to safeguard the funds.

Recording Petty Cash Transactions

There are two main journal entries involved in petty cash accounting:

• Fund Establishment: When you initially set up the petty cash fund, debit the "Petty Cash" account and credit the "Cash" account for the designated amount.
• Fund Replenishment: As employees spend the petty cash, they should obtain receipts for all purchases. When the fund reaches a predetermined low point (often half the initial amount), a custodian replenishes it. Here, you debit various expense accounts based on the receipts (e.g., office supplies, postage) and credit the "Petty Cash" account for the total amount spent.

Maintaining Internal Controls

To ensure the integrity of your petty cash system, implement these internal control measures:

• Pre-numbered Receipts: Utilize pre-numbered receipts to track every petty cash disbursement.
• Approval Process: Require supervisor approval for all petty cash requests exceeding a specific amount.
• Reconciliation: Regularly (usually monthly) reconcile the physical cash in the petty cash box with the documented expenditures and remaining balance. Any discrepancies should be investigated and resolved promptly.

Beyond the Basics: Petty Cash in the Digital Age

While traditional paper-based systems are still viable, technology offers several advantages for managing petty cash:

• Petty Cash Software: Consider using dedicated petty cash software that streamlines recordkeeping, automates calculations, and facilitates expense approvals.
• Prepaid Cards: Explore issuing reloadable prepaid cards to designated employees for petty cash purchases. This eliminates physical cash handling and provides better expense tracking.

Conclusion

A well-designed petty cash accounting system ensures streamlined handling of minor expenses while maintaining internal controls. By following these steps and considering the digital tools available, you can establish a system that promotes both convenience and financial accountability within your business.