Petty Cash Management in 2023: An Essential Guide

What Is Petty Cash?

Petty cash is a small amount of money kept aside to account for unplanned expenses. It's kept readily available as it may be required for unforeseen costs like urgent employee reimbursements or pressing vendor payments.

Did you know the word ‘petty cash” is derived from the French word petit, meaning 'small' or 'little'? The name ties in perfectly with the purpose, as the payments made by petty cash are usually too small to be made using a credit card or any other payment method. In the instances of small or immediate payments, petty cash payments become a more accessible alternative as it's fast and straightforward.

Petty cash needs periodic adjustments and revisions. It's critical to record petty cash expenditures on financial statements to get a full picture of the total company expenditure. Regular book-keeping reduces the risk of theft and fraud, which happens to be the biggest risk of using petty cash. 

Where Is Petty Cash Used?

Petty cash can be utilized for any payment that might be deemed too small for swiping a credit card or writing a cheque. The amount kept aside for petty cash funds varies from company to company. It's highly dependent on the requirements of the organizations and the number of urgent expenditures they come across.

Larger organizations even consider having separate petty cash funds for each department to streamline the payment process. Petty cash can be used for office supplies, outings with the team, birthday celebrations for employees, and small work-related reimbursements. 

Depending on the size of the organization, a group or an individual is usually appointed to keep petty cash payments in check. They are responsible for ensuring that rules are being followed, reimbursements are being carried out flawlessly and there is no delay in dispatching the funds.

But why do we need petty cash?

Making payments in an organization is not as simple as it looks. Each payment takes time to process and has to go through several layers of approvals. But something as small as getting an employee a cake for their birthday celebration should not have to wait that long. As every organization is trying to fast-track transactions, having petty cash and authorized individuals to manage these funds becomes necessary. Most companies have rules to manage petty funds to ensure that no unnecessary payments are being made.

How do you book-keep petty cash transactions?

Petty cash payments are recorded in financial statements just like any other company transaction. However, accounting journal entries are not made while transactions are done using petty cash. Instead, journal entries are recorded in exchange for the receipts when petty cash funds need to be replenished. While replenishing, a certain amount is debited to petty cash funds.

In case there is a shortage or overage of petty cash funds, a journal entry is suggested to be made. The journal should have a credit entry to represent the gain if the funds go over. On the other hand, if the funds fall short, a debit should be entered to illustrate the loss on the company's behalf. The loss/ gain entries help balance the transactions at the end of each month or tally cycle.

Petty cash records and documentation can be enhanced by filling out petty cash slips and connecting them to receipts, as suggested by the Internal Revenue Service. 

How do you restore petty cash transactions?

Periodic reconciliation of petty cash is suggested to ascertain the balance at the end of each month. If the petty funds fall short, the authorized individual asks for extra money to be designated to the funds. While more funds are being added, all the receipts and bills are considered to make sure everything is in check. The cashier usually issues a check to add to the funds while taking into account the transactions that depleted the funds to begin with. 

Periodic reconciliation is necessary as the balance amount needs constant verification. In the process, the balance amount automatically keeps getting verified as it must be equal to the amount deposited in the petty fund with the reduction of the expenditures made. 

How to start a petty cash fund 

A dedicated account must be set up to start a petty cash fund. If required, the account can be listed separately on the company's balance sheet. The company can then allot a particular amount of cash required, according to the number of small payments made every day. An individual will need to take up the responsibility of handling petty cash-related operations. The custodian would have the authority to request for more funds as and when required, along with keeping a tab on the receipts. 

What is a petty cash voucher?

Petty cash vouchers are forms used to record payments made from the petty cash fund. They are also known as petty cash receipts. It usually includes the following details: the transaction amount, the date of the transaction, the objective of the payment, details of the recipient and records of the individual making the payment. 

Petty cash vouchers are usually numbered for easy operations and processing. Attaching bills and receipts to the vouchers is considered to be a good practice and is adopted by numerous organizations. Maintaining vouchers also helps ease reconciliations and maintain balances. 

More on Petty Cash 

• Petty cash must not be confused with cash on hand. Petty cash is allocated to departments with specified payment domains. It’s used for expenses too small to account for with bank transfers. On the other hand, the company’s cash can be used for any payment the company comes across. 
• Transaction logs are a great way to track petty cash expenses. It helps massively with calculating the balance at the end of each period. 
• The funds being allotted for petty cash must be revised periodically to meet the needs of the organization.

Pros of Petty Cash

• There's no denying that cash payments are quick and straightforward.In addition to simplicity, petty cash eradicates the need for approvals and makes the process easy, specially in the case of unforeseen expenses. 
• It furthermore eliminates the need for reimbursing employees in the case of small transactions like cab fares or tipping at a restaurant. 
• Another advantage of petty cash is that it can be used for small, redundant expenses, such as stocking the pantry for the office or purchasing office supplies. 
• Most importantly, it requires no planning or approvals and can be used immediately at the time of need. It works well with emergencies and unplanned expenses. 

Cons of Petty Cash

• The convenience and ease of expenditure also works like a bane at times. It increases the chances of fraud, as tracking cash is not always possible. 
• Since no approvals are needed to spend petty cash, it might lead to a lot of unnecessary expenditures, which could eventually add up to a considerable amount for the organization. 
• Even though most companies are careful about storing receipts, they often go missing without a trace. It then becomes really tricky to calculate balances at the end of each month. 
• To minimize the risk, it's crucial to have a responsible individual who tracks and conciliates petty cash funds periodically. The constant need for record-keeping could add to the work pressure and burden the accounts department. 
• With the advent of online transactions and electronic wallets, only a few wish to accept payments in the form of cash. It makes transactions less traceable and also increases the chances of theft. 

Final thoughts 

Given its simplicity and perpetual availability, the risks involved with petty cash must be considered as well. While some believe cash payments are outdated, many organizations work smoothly with petty cash and end up fast-tracking several expenses. However, alternatives like Alaan’s prepaid cards allow you the advantages of petty cash without the risk, with companies eliminating petty cash completely. The decision to invest in petty cash funds could vary from business to business. Ultimately, a combination of prepaid cards and a small emergency petty cash fund might be the best way to go, giving you the best of both worlds while minimizing risk. 

‍