It might be tempting to wing it for as long as you can, but setting up a proper petty cash system early is crucial. If you find yourself going through petty cash rapidly, you can increase the amount of petty cash you keep on hand. Petty cash can also work for frequent but mundane expenses, like milk for the office fridge, stamps, or cleaning supplies. “Petty cash” and “cash on hand” sound a lot alike, and they do overlap.
You have to keep enough cash on hand to make change for customers and accept payments in cash for those customers who do not use credit or debit cards. There are some financial terms in the world of business that might throw managers off a little. We have put together a detailed guide, providing the definition of this important term and what exactly it’s used for. That depends on how many small expenses you make and how often you make them, but most businesses seem fine carrying between $100 and $200 in petty cash. For additional security, you can require the custodian to keep a log of who refunds are given to. You might even enter the names of employees who request funds and why they may need them—it might indicate an expense you weren’t aware of.
- Large purchases might require using a company credit card or writing a check.
- The petty cash custodian refills the petty cash drawer or box, which should now contain the original amount of cash that was designated for the fund.
- Often, a few individuals are authorized to approve disbursements and can only do so for expenses related to legitimate company activities or operations.
Petty cash funds should be reconciled at regular intervals to double-check that everything is balanced and accurate. It might seem tedious to log every tiny expense in this way, but there’s nothing petty about petty cash expenses. You must document all of your petty cash expenses if you want to write them off on your taxes, just like you would any other income or expense. The next step is to write a check to petty cash for $200, cash it, and stow it in your cash register or lockbox. Many small businesses don’t have a formal system for petty cash—owners will simply pay out of pocket for small expenses and hope nothing goes wrong.
Why do I need a properly set up petty cash fund?
Obviously, companies don’t want lots of cash just sitting around in the office. The amounts vary between companies but may be anywhere from $50 to $500. This amount is usually spent over a period of a month or two, and is replenished when necessary. This credit card is not just good – it’s so exceptional that our experts use it personally.
The total of the receipts and remaining cash should equal the initial amount of petty cash funding at all times. However, recordation errors and theft may result in a variance from the initial funding amount. To set up a petty cash fund, the cashier creates a check in the amount of the funding assigned to a particular petty cash fund (usually a few hundred dollars). Alternatively, the cashier could simply count out the cash for the petty cash fund, if there are enough bills and coins on the premises. The initial petty cash journal entry is a debit to the petty cash account and a credit to the cash account.
Requirements for Petty Cash
For slightly larger small businesses, this might be your office administrator. You need to make a last-minute courier delivery, and the post office closes in 15 minutes. Oh, also, you need to buy your team some food for a late afternoon sprint, and the office printer https://www.quick-bookkeeping.net/free-freelance-independent-contractor-invoice/ is out of ink. Your company isn’t big enough to have company credit cards yet, and you’re big on keeping personal and business expenses separate. To record the petty cash transactions for August, you would need to record the expenses as a journal entry.
Between $100 and $200 is fairly common, though you can go lower or higher, depending on your business. Petty cash refers specifically to money—literally, coins and bills—that a company keeps on hand for small outlays, usually because using cash is easier than using a check or credit card. If you’re a small business owner, it’s important to understand how petty cash can be used so you can account for it correctly in your books.
If you have more than one employee, you could delegate managing the account. The custodian is tasked to overlook and safeguard the account by issuing cash, approving reimbursements, and recording the debits and credits to the account. “Petty cash” is the term used quality of design and quality of conformance to refer to the money a business keeps handy for unexpected expenses that occur. If you have an office manager, they’re the most likely choice to manage the petty cash fund. Before you start a petty cash fund, you’ll need to decide how much you want the fund to be.
Advantages and Disadvantages of Petty Cash
Even though most instances of petty cash use a rather insignificant amount of money, there is a need to monitor it closely because it can add up to a significant amount over time. While these are main steps that small business owners take to utilize petty cash, there are other processes that should be considered to get the most out of it in the long run. There are a number of ways that businesses can benefit (and suffer) from having petty cash at their disposal. Anyone who has ever run a small business knows that petty cash always plays an important role. There’s no doubt that most small business owners regularly have to deal with it. If you use accrual accounting, the top-up may be credited from accounts payable instead of cash.
Making sure that any expense you reimburse has a receipt is also helpful. Commercial transactions are increasingly cashless—even at small retailers and restaurants, where purchases traditionally have relied heavily on coins. The Internal Revenue Service (IRS) recommends filing out petty cash slips and attaching them to receipts to record and document petty cash expenses. A monitoring and tracking system, with receipts, should be used for the petty cash fund. But, this reconciliation process can tell companies whether there is a significant shortage or overage of petty cash so that it can be investigated further to discover why there is an imbalance of funds.
Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s “on hand.” A petty cashier might be assigned to issue the check to fund the petty cash drawer and make the appropriate accounting entries. The petty cash custodian is charged with distributing the cash and collecting receipts for all purchases or any uses of the funds. As the petty cash total declines, the receipts should increase and add up to the total amount withdrawn. While the amount of money might be small when dealing with petty cash, there should still be a record of every petty cash transaction. The petty cash cashier or custodian should have financial statements, including request forms from employees and receipts for proof of purchase, every time petty cash is used to make a business purchase.