How To Set Up and Manage a Petty Cash Account

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 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. The petty cash log is one of the most important components of managing petty cash. Any transactions made into or out of petty cash need to be recorded on the petty cash log.

Once you determine who will handle petty cash, you’re ready to cash a check and deposit the funds into the petty cash lockbox. Petty cash is the money a business keeps on hand to pay for miscellaneous purchases. Most purchases made with petty cash are unexpected expenses that can pop up, such as morning coffee for a meeting or dinner for an employee working overtime.

Step 4: Go to an ATM, or write a check to petty cash

Each entry in the petty cash book should include the date, the amount, and what was purchased with the petty cash. Review your petty cash register before you replenish the petty cash fund. Most people use petty cash for things like buying office supplies, paying for postage, and so on. Petty cash is a common form of imprest system (I.E. financial accounting system), and is a pre-designated amount that’s built into the budget and replenished after a set period of time or when it runs out. The typical range of petty cash funds for small businesses is around $50 to $300.

These are some commonly asked questions because the concept of petty cash funds sounds outdated. But it’s true that many businesses still manage petty cash funds, petty cash drawers, and sometimes petty cash registers. A formal petty cash system can also grow with a business, scaling as the company adds offices and employees. If the voucher amounts do not equal the cash needed to replenish the fund, the difference is recorded in an account named cash over and short.

How Petty Cash Works

This lets you reconcile—that’s fancy accounting speak for “double check”—your petty cash fund on the fly. Small businesses will often record all disbursements in a log and put one person in charge of petty cash to make sure none of the funds go missing. Petty cash is simply any physical cash your business keeps on hand to pay for small, unplanned expenses. Most businesses won’t keep more than a few hundred dollars in petty cash around.

• Your available cash should always match the amount recorded in your petty cash log.
• If your company is larger, you may need to have more than one fund custodian.
• Companies assign responsibility for the petty cash fund to a person called the petty cash custodian or petty cashier.
• This reduces the need for employee training or constant reminders about spend policies.

Several of those jobs were in brick and mortar businesses that had petty cash on hand. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. For example, you don’t want to use petty cash for high priced expenses, so it can help to set a dollar limit, such as $25.00. Anything over that amount would be paid for or reimbursed using other means. Making sure that any expense you reimburse has a receipt is also helpful.

GAAP Rules for Petty Cash Funds

Without a physical, dedicated place to keep the petty cash, you’ll probably lose track of it, and/or make so many exceptions to when you use the petty cash that it stops being useful. As you can see there are reasons businesses still need petty cash to buy items of low cost. A larger business, however, may need to keep $500 or more for petty cash.

Click here to read our full review for free and apply in just 2 minutes. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

With these practices in hand, companies can better understand what cash they need on hand and when they need that cash. A company’s cash ratio compares the amount of cash and cash equivalents a company is holding compared to its short-term obligations. Most analysts may recommend holding between three to six months of liquid cash and cash equivalents to ensure continual operations. Be mindful that holding excess cash may be safter but more inefficient. Most employees rely on petty cash in such instances than paying their own money and waiting for reimbursement.

On the downside, the convenience of petty cash can also make it a problem, and a risk. Cash is hard to secure and impossible to track; it’s very easy for bills to disappear without a trace—even if you’ve why do businesses use petty cash funds? established a careful system of receipts or vouchers. The Internal Revenue Service (IRS) recommends filing out petty cash slips and attaching them to receipts to record and document petty cash expenses.

Requirements For Petty Cash

For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15. Reconciliation of the petty cash fund should be done periodically to ensure that the fund’s balance is correct. Petty cash refers to a small amount of hard currency that a businesses will keep on hand to pay for miscellaneous and unexpected items, such as team lunches, birthday cakes, or office snacks. Petty cash is usually a relatively small amount, and is grouped with the general cash account on the balance sheet in current assets. Since purchases using the petty cash fund are small, it’s typical to see purchase limits of $50 or less with a total account balance of a few hundred dollars. A petty cash account provides an easy way for employees to pay for postage, extra supplies an employee might need, or snacks you might buy for a meeting with a client.

• In fact, it is an antiquated practice and often brings more risks than benefits, especially to businesses that mostly operate online.
• Think of it as the vital fluid that keeps your business’s heart pumping, allowing you to cover expenses, pay employees, and invest in growth.
• Without a physical, dedicated place to keep the petty cash, you’ll probably lose track of it, and/or make so many exceptions to when you use the petty cash that it stops being useful.
• Jane doesn’t have a credit card and has only $25 to last her until she gets paid.
• It’s important to account for petty cash uses in your general ledger because it is an expense recorded in your financial records, like the balance sheet.
• When you’re ready to replenish the fund, record the expenses in your accounting software based on the petty cash expense log.