Petty cash funds are common in business. As the name suggests, petty cash is for expenses that are small, incidental, and infrequent. Having a petty cash fund provides a quick and convenient way for business owners to reimburse themselves and employees for business costs they paid for with their own money, thus avoiding the tedious task of writing cheques from their bank accounts for small expenses. Here’s what you need to know about managing your petty cash fund.

What is petty cash intended for?

Business owners often need their employees to pick up supplies, or lunches, for the office. Employees can either be given cash for these expenses in advance from the petty cash fund or, more commonly, they can be reimbursed after having made the purchase by presenting a receipt.

If an employee is not comfortable using their own money for these small business expenses, a business owner can simply give them cash from the petty cash fund in advance of making a purchase on the business owner’s behalf. 

How do you use petty cash in your business?

Starting a petty cash fund and using it in a business is fairly straightforward. This article will walk you through easy steps and considerations to both start and manage a petty cash fund. 

How much is needed?

When a business owner is looking to first set up a petty cash fund, they need to think about the small expenses they would likely use it for. Petty cash is commonly used for office supplies, lunches with clients, Christmas cash for employees, postage, small games for a planning retreat, etc.

Having a general idea of what expenses could be paid for with petty cash will give the business owner insight into how much cash they need to keep in the fund. Between $100 and $500 should be enough petty cash for most small businesses that want a convenient way to cover small infrequent expenses.

What expenses are appropriate?

The business owner needs to make it clear what the fund can be used for and what it cannot be used for. The petty cash fund’s allowable expenses will generally fall within existing general budget expense areas such as client relations, office engagement, retreat planning, office supplies, etc.

This will not only help ensure that the cash is being used appropriately, but will also make it easier for your accountant to reconcile the petty cash fund and put the expenses in the correct expense buckets. 

Who will manage the petty cash?

One person needs to manage the disbursement of petty cash fund. More than one person taking from the fund can make managing it difficult and could open the door to theft. An administrator who may also have other responsibilities, such as managing the front desk and answering the phone, is often an appropriate person to manage the petty cash fund.

While only one person is managing the petty cash disbursements, another employee, such as a bookkeeper, should use the record of petty cash disbursements to reconcile the balance, record expenses, and replenish the petty cash fund. 

Where should you keep the petty cash fund?

A business owner needs to balance the convenience of location and security of the funds when determining where to keep the fund. Keeping it in a small lock box in a locked desk drawer will help keep it safe. 

The tracking log

A petty cash fund tracking log can be purchased from a local stationary store, or a petty cash log template can be easily downloaded. Key information every tracking log should have for each transaction includes the date, description, amount deposited or withdrawn, expense account charged, who received or deposited the cash, and the person who managed the transaction. The person who manages the petty cash should be the one to record these details in the tracking log.

Reconciliation

The timing of the petty cash fund reconciliation will depend on how frequently the business uses it. However, to ensure proper management and use of the fund, it is important to reconcile at least once per month, regardless of how frequently it is used. 

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Reconciliation should be conducted by someone other than the person managing the petty cash fund. This person is often the accountant or bookkeeper of the business. If the petty cash fund tracking log has been filed correctly, reconciliation is an easy task.

Simply take the balance at the beginning of the period, add all cash inflows and subtract all cash outflows, and you should be able to calculate the amount of cash remaining. If there is a discrepancy, the person reconciling the fund will need to work with the person managing it to determine the cause. Discrepancies are most commonly due to missed transactions in the petty cash log.

How much should be in the fund?

Business owners should periodically revisit whether the amount kept in the petty cash fund is enough, or if it needs to be increased or decreased. Once the petty cash fund has been reconciled, funds can be added or subtracted to increase or decrease the balance to an amount the business owner deems appropriate.

Summary

Keeping a petty cash fund provides a convenient and efficient way to cover incidental expenses. However, given the ubiquitous use of credit cards, fewer businesses are using petty cash for such expenses. Many businesses today have company credit cards for expenses traditionally covered by a petty cash fund.

Each credit card transaction is automatically tracked by the credit card company, which makes statements available to be viewed online at any time. Moreover, cloud-based bookkeeping services can automatically classify and provide journal entries from electronic credit card statements. 

FAQs About Petty Cash

When is a petty cash fund useful?

Petty cash is useful to pay for small things like coffee, postage, lunch for the office, birthday cards, etc. If your business uses cash for most transactions, a petty cash fund will come in handy for small expenses you don’t anticipate. However, if your business mainly uses electronic forms of cash such as debit cards, credit cards, e-transfer, or online merchant services, having a petty cash fund will be less useful. 

Does petty cash go on the balance sheet?

Yes, expenses that are paid using petty cash go on the balance sheet (also known as the statement of net position) as well as the income statement and cashflow statement. The entries are commonly completed using accounting software such as Xero and Quickbooks.

How do I decrease a petty cash fund?

A business owner could decrease a petty cash fund in one of two ways. First, she could use the petty cash fund to pay for small incidental expenses. Second, she could reduce the amount that is commonly kept in the fund. 

How do I set up a petty cash fund in QuickBooks?

To set up a petty cash fund in Quickbooks, first create a new asset account, called “petty cash”, in the chart of accounts. Next, transfer the amount of cash you would like to have in the petty cash fund asset account. You can do this by crediting the cash account and debiting the petty cash fund account. When the bookkeeper is completing the journal entries in Quickbooks to record the expenses from the petty cash fund, he will take the petty cash fund log, debit the noted expenses, and credit the petty cash fund. Once the petty cash fund becomes low on cash, the bookkeeper will start the process over again by debiting more cash into the petty cash fund account from the cash account.

What’s the difference between petty cash and cash?

Petty cash is the cash a business owner keeps on hand for small incidental expenses such as food for employees, postage, and office supplies. Cash is the available cash a business has access to for whatever purpose. Both petty cash and cash will be shown on the left-hand side of a business’ balance sheet under current assets.

What type of expense is petty cash?

Petty cash is not considered an expense. An easy way to think of it is as a method to pay for small incidental expenses. A business owner would set aside a certain amount in a petty cash fund for these types of expenses. The expenses themselves that were paid using cash from the petty cash fund will be expensed, not the petty cash itself. 

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