In every organization, there are numerous small expenses that occur daily. Petty cash is a convenient and efficient method used to manage these minor expenditures; it is a small amount of money kept on hand to cover immediate expenses that cannot be easily handled through other means, such as checks or electronic transactions. In simple terms, petty cash is a small sum of money that a business keeps on hand to pay for small items or unexpected expenses that come up from time to time.
Generally, petty cash is used to pay for things like office supplies, postage, or small emergency repairs, and is usually managed by a designated employee or department.
How Does Petty Cash Works?
Petty cash operates on a simple principle: a predetermined amount of cash is set aside, typically in a secure box or drawer, and designated as the petty cash fund.
This fund is managed by a designated custodian who is responsible for safeguarding the cash and ensuring that it is used only for valid business expenses. When an employee incurs a small expense, like purchasing office supplies, they can request reimbursement from the petty cash fund.
What Are the Types of Petty Cash?
Petty cash can be categorized into various types based on the specific needs and nature of the company, but some common types include:
- General Petty Cash: Used for a wide range of miscellaneous expenses that arise during regular business operations.
- Travel Petty Cash: Often utilized by companies with frequent business travelers, this petty cash is specifically designated to cover expenses related to travel, such as taxi fares or meals.
- Office Supplies Petty Cash: Used exclusively for purchasing office supplies like stationery, printer ink, or other small items required for daily operations.
How Much Petty Cash Is Allowed?
The amount of petty cash that a business can keep on hand varies, depending on the requirements of the company. Generally, the amount of petty cash is relatively small, usually ranging from $50 to $500. This is because petty cash is used only for small and unexpected expenses, but larger organizations may have higher limits.
How To Record Petty Cash?
It is essential to keep accurate records of all petty cash transactions to manage the cash efficiently. Each expense or transaction must be recorded on a petty cash voucher or request form. The voucher must include details of the purchase, the amount spent, the date, and the name of the person who received the money. At the end of each period, all vouchers are reconciled and replenished by a manager or authorized personnel.
The following steps outline an effective method for recording petty cash:
- Establish a petty cash log: Create a logbook to track all petty cash transactions. Include fields for the date, description of the expense, amount spent, and the name of the person who received the cash.
- Issue receipts: Ensure that anyone receiving petty cash provides a receipt or document as proof of the expense. This helps validate the transaction and prevents any discrepancies.
- Reimbursement procedure: When the petty cash fund needs replenishing, a reimbursement process should be established. The custodian should submit the logbook and supporting receipts to the authorized person, who will provide cash to restore the fund.
Reconciling Petty Cash
To ensure that the balance remains accurate and that all expenses are accounted for, it is important to regularly reconcile the petty cash fund. The reconciliation process involves comparing the remaining cash in the petty cash box with the total of all recorded expenses. Any discrepancies should be investigated and resolved before a new period begins.
Is Petty Cash The Same As Cash on Hands?
Petty cash and cash on hand are not the same things. Cash on hand refers to the total cash currently available to the business, including cash in the bank, cash in the register, and any other cash that is readily available. Petty cash is a small, designated amount of money that is used for specific expenses.
Although both terms refer to physical currency, petty cash and cash on hand have different purposes and contexts. Petty cash is a small amount of money set aside for immediate expenses, whereas cash on hand encompasses all available cash, including larger sums used for various financial transactions. Petty cash serves as a convenient tool for managing minor expenses efficiently, while cash on hand represents the broader financial resources of an organization.