Understanding Petty Cash: Essential Guide for Effective Management

Petty cash doesn’t have to be complicated. In fact, with a few simple steps, you can create an efficient and secure system. This guide simplifies petty cash management for small business owners. We cover the basics, from setting up a fund to replenishing it. Additionally, we provide free petty cash templates and explore modern, digital alternatives. Simplify your financial processes with us!

Petty Cash Meaning

Petty cash refers to a small amount of money a business keeps on hand to pay for minor, day-to-day expenses. Here’s a breakdown:  

Purpose

• Businesses use petty cash for small, incidental purchases where using a credit card or writing a cheque would be impractical.
• Examples include office supplies, postage, small delivery fees, and minor employee reimbursements.

Key Characteristics

• It’s a relatively small amount of cash.
• It’s kept readily available for quick and easy access.
• It requires careful tracking and record-keeping to prevent misuse.

Why it’s Important

• It streamlines small, immediate transactions.
• It avoids delays caused by lengthy approval processes for minor expenses.
• It helps keep employees from using their own funds for small business expenses.  

Essentially, petty cash is a tool that allows businesses to handle small but necessary cash transactions efficiently.

How to Manage Petty Cash

Managing petty cash requires a consistent and organised approach to ensure accuracy and prevent misuse. Here’s a guide to managing your petty cash fund:

1. Establish Clear Spending Guidelines:

It is essential to set clear guidelines, including what expenses are acceptable for petty cash and spending limits for individual transactions.

2. Implement the Voucher System:

Every disbursement requires a completed petty cash voucher. (Free petty cash vouchers are available below.) Complete the vouchers with the following:

• Date of the transaction
• Amount of the expense
• Purpose of the expense (be specific)
• Signature of the person receiving the cash
• Signature of the petty cash custodian

Always obtain purchase receipts whenever possible and attach them to the corresponding voucher.  

3. Maintain Accurate Records:

As with all accounting, accurate records are essential. The easiest way to do this is to keep a petty cash book or a spreadsheet. Record each disbursement’s date, voucher number, amount, and purpose. When someone makes a disbursement, they should place the voucher in the cash tin until reconciliation. Complete regular reconciliations to ensure the transactions are correct.

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4. Secure the Petty Cash Tin:

Store petty cash in a locked and secure location. Limit access to the designated custodian to minimise the risk of theft or unauthorised use. Petty cash tins can be purchased from Amazon.

5. Replenish the Fund Regularly:

Effectively manage petty cash by replenishing the fund when it reaches 25% of its initial amount. Begin by totalling the amount of all disbursed petty cash vouchers, then write a cheque or withdraw cash for that actual cash amount to replenish the fund.

Be sure to record the replenishment in your accounting system. When replenishing, the sum of the cash in the petty cash tin and the vouchers’ total amount should equal the original petty cash amount. This process ensures that your petty cash fund remains accurate and ready for use.

6. Conduct Regular Audits:

Periodically auditing the petty cash fund is essential to verify its accuracy. It involves counting the cash on hand, comparing it to the records, and reviewing the vouchers and receipts for completeness and accuracy. These audits help detect discrepancies or potential fraud, ensuring responsible and efficient petty cash fund management.

7. Handle Discrepancies Promptly:

Investigate any discrepancies between the cash on hand and the records. If someone finds a discrepancy, they must immediately identify the cause and take corrective action. Document all discrepancies thoroughly, along with the steps taken to resolve them.

8. Segregation of Duties:

Where possible, separate the duties of authorising expenses, disbursing cash, and reconciling the fund. It reduces the risk of fraud.  

Following these management practices ensures you use your petty cash fund responsibly and accurately.

Petty Cash Management Tools

We have developed some free tools to assist in managing petty cash.

Petty Cash Template or Log

We have created a Microsoft Excel petty cash template, which you can download for free for your business. It lets you keep detailed records of all income and expenditures, making reconciling easier. It is an alternative to a petty cash book.

This free template helps you manage your business’s petty cash log. It is easy to use and will save you time on your reconciliation.

Petty Cash Vouchers

Our free petty cash vouchers or slips are used to record the details of each transaction and includes space to record the following information:

• A unique voucher number
• Transaction Date
• Details of the purchase include as much information as possible
• The total amount of the transaction
• Authorisation of the voucher

Once someone records the details, they attach the receipt to the voucher and keep it in the petty cash tin.

Petty Cash Slips Example

The above example shows that the employee took 50.00 from the petty cash fund, returned 14.52, and spent the remaining 35.48. The employee attached the receipt to the voucher.

Petty Cash Reconciliation

Petty cash reconciliation is a critical process that ensures the accuracy of a business’s financial records. The reconciliation process involves regularly verifying that the petty cash fund’s actual cash and the petty cash slips and vouchers match the amount recorded in the petty cash book. Discrepancies can be identified and addressed promptly by reconciling petty cash transactions with the business’s bookkeeping system, including the balance sheet and bank accounts.

Conducting monthly reconciliations helps prevent fraud and theft and ensures that minor expenses are accurately tracked and reported.

Petty Cash and Bank Accounts

Petty cash is essential for managing daily minor expenses and is a current asset on the balance sheet. As a current asset, petty cash represents a small sum of money reserved for immediate use. When replenishing petty cash, funds are moved from the business bank account to the petty cash fund, impacting both cash and bank account.

Regular reconciliation of petty cash transactions with the balance sheet is vital for accuracy. This means ensuring that the total petty cash fund, including cash and documented expense vouchers, matches the petty cash amount recorded.

By effectively managing petty cash and regularly reconciling it, businesses can ensure their balance sheets accurately reflect their financial status.

Alternatives to Petty Cash

With the rise of cashless payments, businesses are increasingly exploring alternatives to traditional petty cash systems. Here are some modern options that can streamline financial management and enhance security:

Prepaid Cards

Prepaid cards offer a flexible and secure way to manage small business expenses. These cards can be loaded with a specific amount of money, allowing employees to purchase within the set limit.

Prepaid cards eliminate the need for actual cash, reducing the theft risk and making it easier to track petty cash transactions. They also provide detailed transaction records, simplifying reconciliation and enhancing financial transparency.

Debit Cards

Business debit cards are another effective alternative to petty cash. They are linked directly to the company’s bank account, allowing controlled spending on minor expenses. Debit cards offer the advantage of real-time transaction tracking, enabling businesses to monitor spending closely. They allow for easy reconciliation with bank accounts and financial statements, ensuring accurate accounting of all petty cash transactions.

Both prepaid and debit cards can be integrated into a business’s petty cash policy, offering a modern solution that aligns with today’s digital financial landscape.

Claiming Business Expenses

Another option is to allow employees to submit a business expense claim. This method might be popular with companies, but it requires employees to cover expenses out of their own pockets until they receive reimbursement. We have created a free Business Expense template for download.