What is Petty Cash

What is Petty Cash | Accounting Smarts
Charles Hall

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Charles Hall

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June 10, 2022

When you're new to small business accounting, the easiest concepts can seem impossible to grasp, one of them being petty cash.

When you're new to small business accounting, the easiest concepts can seem impossible to grasp, one of them being petty cash.

The name may indicate that it's a meaningless fund, but there's real value in petty cash. 

Petty cash is a fund that a company keeps on hand to cover cheap expenses and fund small purchases at any given time. Petty cash is to be used for business expenses only and comes in handy to fund purchases that cost too little to warrant writing a check or using a business credit card. 

You may be wondering why petty cash is different from other sources of cash and what it means for your business. In this article, we will cover that in addition to the ins and outs of petty cash, how to record the funds, and more. If you're interested in learning more, then keep on reading!

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Definition of Petty Cash

Having a petty cash fund is essential for your company's financial health. But before starting the fund, you should completely understand what a petty cash fund is. 

To put it plainly, petty cash is a fund that companies keep on hand for tiny purchases that may need to be made to keep the business going. The funds are usually kept on the business's site in a box and are used when other cash disbursement methods don't make sense or are unavailable. 

As a general guideline, one petty cash transaction should not exceed $25. 

How Petty Cash is Used

People who are new to the practice of keeping a petty cash account may get confused when doling out payments. In this section, we will give you examples of which types of transactions businesses use petty cash for. 

Petty cash can be used on the following impromptu expenses: 

  • Reimbursement to employees for transportation. 
  • Purchasing flowers as a thankful gesture for clients. 
  • Buying lunch for employees. 

Start Your Petty Cash Fund

Now that you know what petty cash is and what it should be used for, you are ready to start your fund. A petty cash fund is usually started with a set amount of money, and the amount you start with is up to you. 

Most companies start their petty cash fund with as little as $30 and as much as a few hundred dollars. The amount that you choose may be determined by the size of your company. A larger company may keep a larger petty cash fund than a smaller company. 

You may also opt to create multiple petty cash funds, in which case you could have one petty cash fund per department or facility. You get to choose every aspect of your petty cash fund- it is your fund, after all! 

Appoint a Petty Cash Custodian

Unless you are a sole-proprietor, it may be worthwhile to appoint a petty cash custodian to do the following: 

  • Make sure that the funds are locked away securely when they are not being used. Without proper fund security, the money is free for anyone to take and use for their own expenses. 
  • Enforce rules regarding petty cash use. If anyone can access the petty cash box, they may take money out to pay for things that are not appropriate. 
  • Request that more cash is added to the fund when necessary. To keep the fund going, cash should be replenished as it is spent. 
  • Keep records of what the cash was spent on in the form of receipts. The receipts should total up to the amount of petty cash that was spent. 

A petty cash custodian should be trustworthy, detail-oriented, and good at basic math. They should not be anyone who is in dire need of cash or doesn't follow the rules and regulations. 

Appoint a Petty Cashier

You may have noticed that the petty cash custodian does not handle all of the petty cash duties. A petty cashier should be appointed to do the following: 

  • Record the petty cash transactions in the company's accounting journal. 
  • Write a check for the funds to replenish the petty cash box. 

Note: It's important not to appoint the same person to do both the duties of the cashier and custodian. Having both helps to ensure that the funds are secure and used appropriately. 

Benefits of Having a Petty Cash Fund

It's not mandatory to have a petty cash fund, but many companies do because of the benefits that such a fund provides. You may have already realized some of the benefits, but the following list will let you in on all of them: 

  • Ease of Use. When a small purchase is necessary, the authorized party can simply access the box and pay for the expense. Instead of going through a complicated process to utilize other payment methods, a petty cash fund allows you to quickly access funds to reimburse employees or make a business purchase. This is a quick and easy method for paying small expenses.
  • Security. A petty cash box is small enough to be locked away securely to stave off theft, though the people who have authorized access to the box should be trustworthy to keep it as secure as possible.
  • Lowered risk of credit card fraud. With a petty cash box, there's no need to give employees access to credit card information for small purchases. This lowers the incidence of employee credit card fraud. 

Drawbacks of Having a Petty Cash Fund

A petty cash fund is not without its disadvantages, and knowing these can help you determine whether creating a petty cash fund would be beneficial for your business. The following list will fill you in on these disadvantages: 

  • Time. For small businesses, there may not be very many petty cash transactions to be made, but larger businesses may have a ton of small expenses to pay regularly. Going through the process of dispensing and recording many petty cash transactions could get time-intensive. 
  • Unused credit card benefits. A perk of using business credit cards is that they come with cashback options and points that can come in handy. When petty cash is used in lieu of a credit card, you lose out on those benefits. 
  • Insecure depending on who has access. If you appoint an employee who doesn't have strong moral values, they may dip into the petty cash fund for personal expenses. Also, people who intend to steal can cover their tracks by drafting illegitimate receipts. 

Are Petty Cash Funds Worth It?

Now that you know the advantages and disadvantages of petty cash funds, it's up to you to determine whether the pros outweigh the cons. If your business is small and you find yourself spending money on small purchases frequently, a petty cash fund may be beneficial. 

If you've determined that you want to move forward with a petty cash fund, read the next heading for information on how to correctly record petty cash transactions. 

How to Record Petty Cash Transactions

Recording petty cash transactions are easy compared to other types of transactions. In this section, we will go over a basic petty cash situation. In the example, the petty cash fund starts off with $100 and is allowed to decrease to $10. 

  • Once you set up your petty cash fund, you would record your initial petty cash amount ($100) as a debit to the "Petty cash" account and then record a credit to "Cash" for the same amount. 
  • Calculate the replenishment amount. Subtract that $10 (the ending amount of the petty cash box) from the starting balance of the petty cash box ($100) to arrive at the replenishment amount of $90. 
  • To record the replenishment of the cash box, you will enter $90 as a debit to petty cash and then record a credit to cash for the same amount. 

The balance should now be restored to the original amount of $100. 

Final Thoughts

Now you know all you need to know about petty cash and how to create your own fund for your business. We hope that this article is helpful to you in your effort to understand petty cash!

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall