Petty Cash Explained: Types, Pros & Cons?

Petty cash is a small amount of money that a business or organization holds for use in making small and insignificant transactions in a day. This fund is utilized on petty expenses that crop up from business undertakings, including the purchase of stationery, refunding of employee expenses, and slight daily transactions.

What Is Petty Cash?

Writing checks for every item incurred by the organization is a laborious and often unachievable chore. For this reason, using small amounts of cash to pay for tiny things like lunches and office supplies is considerably simpler. Petty cash is useful in situations like this.

A tiny sum of money that a business reserves for petty, incidental costs is known as petty cash. These small contributions cover things like stamps, office supplies, lunches for clients, and stationery. The size of the company may have an impact on the amount of petty cash available.

For example, every department in a large corporation with hundreds of workers will have its petty cash fund.

However, one person is typically in charge of petty cash in small businesses. A great choice for companies with several branches and retail locations is a petty cash management system like happay.

Understanding Petty Cash?

Petty cash is used to make small purchases, where preparing a check or a corporate credit card would be appropriate or impractical. The petty cash that a company feels is small will be different, but most companies will keep around $100-$500 as the petty cash balance.

• Employee lunch
• Employee reimbursements
• Office Supplies
• Stationery
• Rent
• Refreshments for clients
• Internet bills
• Repairs
• Postage
• Manual labor payroll

The fund custodians must manage the petty cash fund. The custodial functions normally encompass petty cash control, compliance with the rules and regulations governing petty cash, replenishment, and disbursement.

What are the Requirements for Petty Cash

Petty cash reserves are very adaptable and useful for reasonable and compliant business costs. However, this does not imply that anyone can use the money for anything.

To manage petty cash, businesses need to have stringent internal regulations and procedures. Internal controls are used by many businesses to manage the money. Authorization and approval of petty cash disbursements are often assigned to a small group of people known as petty cashiers in most organizations.

The petty cashier is in charge of maintaining the petty cash drawer and accurately entering accounting transactions. The petty cash custodian is also in charge of disbursing the cash and gathering invoices and receipts for every expense incurred with petty cash.

What are the Types of Petty Cash?

Below mentioned are the different types of petty cash:

1. General Petty Cash: Money that is kept aside for small, miscellaneous expenses and typically used for office supplies, minor employee reimbursements, and postage.
2. Imprest Petty Cash: This money is defined as the money that is periodically replenished. It is a fixed amount of money that is kept aside to reimburse the employee of the company for small expenses related to business travel.
3. Emergency Petty Cash: This money is kept aside for emergency purposes.
4. Discretionary Petty Cash: This money is kept aside for use at the discretion of a supervisor or manager.

How to Record Petty Cash?

Follow the steps mentioned below to record petty cash:

Step 1: Make Policies and Procedures for Petty Cash

A Petty cash fund can be very helpful for your organization, as it can speed up the process of reimbursement, and the employee will no longer have to pay the money from their pocket for immediate and petty expenses.

To efficiently utilize the petty cash fund of your organization, you’re required to create a list of petty cash policies and best practices that the employee must follow.

1. State Allowable Expenses

Make a list of allowable expenses through which the petty cash fund can be utilized. For example, small expenses like postage stamps, parking, office expenses, etc., can be paid using petty cash. Make sure that you’ve set up a limit within which the expense can be made.

2. Appoint a Petty Cash Custodian

Appoint a petty cash custodian who will look after and distribute the petty cash daily. Moreover, a petty cash custodian will be responsible for keeping the petty cash box and the receipts of the box safe.

3. Set Reimbursement Limit

Companies usually maintain a petty cash fund balance, and the amount will vary according to the needs of your organization. Therefore, always set a reimbursement limit so that you can avoid cash leakage and overpay.

Step 2: Reserve the Petty Cash in a Box

After procuring the petty cash, the custodian is the one who will keep the petty cash in a box and lock it. The petty cash custodian will be the only one who will have access to the box. The box will have the cash and receipts inside it.

Step 3: Reimburse and Record it in Petty Cash Logs

Always remember to reimburse the employee expenses only after they submit their receipts. Next, record the expense in the petty cash log and lock the receipts in the box.

Below mentioned are some of the  fields used in petty cash logs:

• Date: Mentioned the date on which the reimbursement was made.
• Reference Number: Mention the receipt number. You can leave it empty if no receipt number is available.
• Payee: Mention the name of the employee who has asked for the reimbursement.
• Description: Mention the reason for the expense.
• Amount: Mention the amount that needs to be reimbursed.

Step 4: Regularly Reconcile

Whenever the cash is replenished, the petty cash custodian should reconcile it. To track the cash balance, the custodian performs weekly or monthly reconciliations. Petty cash should be reconciled only when the cash is replenished.

The process of reconciliation is very simple. Every time the petty cash fund is used, the receipt of that amount should be replaced on the box. Therefore, in between the reconciliation process, the receipts in the box and the remaining cash should be equal to the original petty cash amount.

Step 5: Log Petty Cash

Whenever cash is required, or every month, the petty cash custodian must sum up the petty cash log using the expense account. Also, the custodian is required to record a journal entry debiting every expense and crediting petty cash.

The starting balance is the petty cash fund balance. In the column of the total amount, enter the total petty cash expenses, and that is the amount you’ll ask for as petty cash reimbursement. So, the ending balance in the petty cash log is the difference between the starting balance and the total petty cash expenses.

Step 6: Reload the cash

The cash might be taken from the checking account to replenish the petty cash box after the bookkeeper records all expenses in the books. The cash transfer might be recorded by debiting petty cash and crediting the checking account.

How to reconcile petty cash?

• To make sure the fund balance is accurate, petty cash needs to be reconciled on a regular basis. The person in charge of petty cash will ask the cashier for more money whenever the balance hits a predetermined threshold.
• The total of all receipts is computed during this period, and it is necessary to make sure that it corresponds with the money taken out of petty cash. The cashier presents the petty cash receipts from the expenses that used up the cash in exchange for writing a fresh check when more money is needed.
• To put it briefly, the process of reconciling petty cash ensures that the residual balance of the funds is equal to the difference between the initial balance and the expenses listed on the invoices and receipts.
• If the remaining balance is less than it should be, there is a shortfall. If the remaining balance exceeds the appropriate amount, it is considered an overage.
• If something doesn’t add up, it’s usually due to fraud, missing receipts, or other issues. Such inconsistencies can be avoided by implementing stronger internal controls.

How to Manage Petty Cash?

If you’re not recording your petty cash carefully, then you can easily waste your firm’s money, which will affect the financial health of the company.

By following the steps mentioned below, you can control excessive petty cash spending:

1. Set up a Budget

You can avoid immediate expenses by your employees by setting up the budget. Notice the spending pattern of your employees. Observe the items they’re spending on, how much they spend, and how regularly they spend. This will help you in setting up a budget.

2. Record of Receipts

Give the employees petty cash slips or vouchers every time they use the petty cash funds. The petty cash slips should have the price along with the date and amount mentioned on them. Ensure to record the name of the employee, the name of the service provider or vendor, and the person name who authorized the cash.

3. Regular Reconciliation

By frequently reconciling the petty cash funds in your organization, you can avoid inefficiencies and unauthorized use. For some organizations, monthly reconciliation works for small businesses, whereas for large organizations, weekly reconciliation can get the job done for others. Therefore, choose a reconciliation system that works for your firm.

Petty Cash VS Cash on Hand

It is important to note, however, that petty cash and cash on hand are not the same term.

Here’s a detailed difference between the two terms:

Petty cash is the portion of working capital that is in the form of coins or bills meant for making small payments since using cash is more convenient than using a cheque or a credit card.

Cash on hand comprises the accessible amount of cash in the business, which is also referred to as liquid funds. This may include the cash that you have yet to deposit in the bank or the small change that you have in the cash register pending to serve a customer. In this sense, the distinction is between where the money is and how it will be used—petty cash being for internal business uses/expenses reimbursed by employees and cash in hand indicating funds received from or to be paid back to customers.

Indeed, cash on hand implies something larger when referring to accounting. In financial management, it is also used to mean the current assets of an organization, which includes cash in a checking account or any other bank account, money market fund, short-term debt securities, and any other cash-like instruments. Despite the fact that it is not actual money, it is money that can be obtained with less effort and in a short period, and therefore, it is on hand.

In short: They indicated that all petty cash is a form of cash on hand, however, not every cash on hand is petty cash.

How Does the Petty Cash System Work?

As we have discussed many times, petty cash is utilized instead of checks to pay for the small expenses in an organization. It takes a lot of time to get a check signed and processed. Therefore, companies always prefer cash to avoid all this hassle.

Moreover, a petty cashier takes care of the accounting and reconciling petty cash expenses in many companies.

This is what petty cash transactions look like in many companies:

• First, a cashier creates a petty cash voucher and receipt.
• Next, the authorizer, generally a top-level manager, approves the petty cash.
• The claimant then receives the approved cash.

Pros and Cons of Petty Cash

Petty cash has multiple advantages, such as being easily accessible. But, it also has its fair share of disadvantages.

Below mentioned are some pros and cons of petty cash:

Pros of Petty Cash

• It is the fastest and easiest way of payment for small and minor expenses in your organization.
• Petty cash is easily available. In many cases, you don’t require any authorization or permission for the cash.
• Petty cash is very helpful for emergency expenses.
• There is no need to wait for the money to be credited to the main account.
• Petty cash is much quicker than checks.

Cons of Petty Cash

• Petty cash funds are highly vulnerable to fraud and theft.
• For large corporations, if you do not have petty cash management software, then tracking and record-keeping is an arduous task, and many discrepancies have roots in this area.
• Handwritten petty cash payments are traditional and need to be clarified. Also, in most cases, they contain errors.

Petty Cash Example

To understand how petty cash accounting is done. Below mentioned is an example:

Suppose a company Pine Pvt Ltd. has a petty cash fund for which it approved $100. Below mentioned is what the entry looks like:

Particular	Debit	Credit
Petty Cash	$100
Cash		$100

Now the custodian will let the cash balance go till $10 before replenishing it. Then, a check will be issued by the cashier worth $90 to replenish the fund.

This is what the entry will look now:

Particular	Debit	Credit
Petty Cash	$90
Cash		$90

The expenses and the amount used for replenishment which are recorded by the cashier, are entered as follows: 

Particular	Debit	Credit
Office Expense	$90
Petty Cash		$90

Therefore, the petty fund amount will be back to the authorized amount worth $100. 

Petty cash refers to cash which is held in premises of a business organization for purposes of meeting minor expenditures and requirements. Petty cash is convenient to handle, very convenient to use, and thus can easily be misused, can be easily accounted for, and is very prone to theft. Some feel that in contemporary society, the petty cash fund is outdated. Enough options are provided over the net for such purchases and these are even relatively secure and efficient if the intended purchase is minor.