The most important part of a petty cash system is the documentation of each transaction. Documenting transactions is the way a business documents business expenses for tax purposes. By keeping track of all petty cash transactions – no matter how petty- you have records to back up deductions for those small business expenses. Corporate credit cards, debit cards, virtual cards, and other electronic payment options all automatically register in a neat summary. This avoids the major pitfalls of petty cash funds and gives you more visibility into company spend.

Process: How Does Petty Cash Work?

• This way, workers don’t need to pay for minor expenses out of pocket and wait to be reimbursed at a later date – they can just use money directly from the petty cash fund instead.
• A few hours later, the HR team approaches Ananya to request funds for a surprise birthday cake for an employee celebrating their work anniversary.
• Often, a few individuals are authorized to approve disbursements and can only do so for expenses related to legitimate company activities or operations.
• Sometimes, the balance in your petty cash fund becomes too low to purchase small expenses.

An accountant will typically write a cheque to “Petty Cash” to fund the petty cash account and cash this cheque at the company’s bank. While petty cash funds only take care of small expenses, these funds still need to be managed correctly. Keeping track of these petty cash expenses helps you to capture all your tax-deductible expenses.

Implementing a Replenishment Process

But if you find that most of your petty cash is not being used, the fund amount might be too large. As mentioned throughout, there should still be some policies and procedures in place to ensure that petty cash is only used for legitimate, business-related purchases. Next, total the amount of all the outstanding slips (plus attached receipts). This figure should be the same as the withdrawn sum you calculated from the account starting and ending balances.

What is Petty Cash Management?

When employees have small expenses, they present receipts to a designated cashier, who logs them in a petty cash book or spreadsheet and reimburses them. Alternatively, the cashier may directly provide funds, requiring the employee to return the receipt. A robust petty cash management system is integral for companies to guarantee the appropriate use and documentation of funds. This system is an internal control, fortifying the business against potential theft and fraud risks. A petty cash fund aims to offer business units enough cash for minor expenses, streamlining the reimbursement process for staff and visitors. By the end of the week, Ananya takes the time to reconcile the petty cash fund.

Integrating Petty Cash with Accounting Practices

This requires analyzing past expenditures to align the fund amount with the business’s operational scale. For instance, a small retail store might require $200, while a larger corporation may need $500 to manage more frequent transactions. Balancing convenience and security is critical, minimizing the risk of theft or misuse. The custodian initiates a bank check request petty cash to restore the petty cash to its original balance, with a reconciliation of receipts and spending preceding replenishment.

Get started with your free trial of BILL today to get more control over your company’s finances. Again, each organization will have its own procedures for handling this process. Typically, they will designate a certain dollar amount at which they’ll replenish the fund. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Everyday Business Expenses

A business can’t vouch and account for every small expense like a cup of coffee, taxi fare, smaller office supplies, etc. On the other hand, these expenses are unavoidable and must be carried out by the businesses. Incorporate your petty cash fund into your budgeting and forecasting processes.

• When initiating the fund, record a debit to the petty cash account and a credit to the bank account in the general ledger.
• This can often be unintentional, like if a team member forgets to register a purchase on the cash log or doesn’t return change to the cash drawer.
• Let’s say an executive assistant at a law firm has received approval from the managing partner to purchase donuts for a staff meeting.
• Petty cash expenses are business expenses — you’ll most likely deduct them from your end-of-the-year taxes.
• You can enjoy its convenience, flexibility, and security by establishing a petty cash fund and implementing robust management practices.
• Not every purchase a business makes warrants using a corporate credit card.
• This ensures the fund’s usage is accurately reflected in the company’s financial statements, maintaining consistency in financial data.

In larger corporations, each department might have its own petty cash fund. Providing access to a petty cash fund can positively impact employee morale and satisfaction. It shows that you trust your employees to handle minor expenses responsibly and empowers them to make decisions without constant oversight. Additionally, accessing petty cash for small purchases can make employees feel valued and appreciated, contributing to a more positive work environment.

Common Mistakes in Petty Cash Management

For instance, software with notification features can flag cash withdrawals exceeding typical limits, enabling quick investigation and resolution. Digital tools, like accounting software or spreadsheets, can make logging easier by offering real-time updates and generating reports. These reports can highlight spending patterns and flag anomalies, such as consistently high expenses in a particular category, prompting a review of spending policies. For example, a business that averages $200 of tax-deductible petty cash expenses per month, could potentially write off $2,400 from its annual tax bill.