Guide to Petty Cash for Business Owners
You may have heard terms like "petty cash expenses" but the technicalities surrounding petty cash may still be unclear. So, what is petty cash and how should small business owners account for it in their financial records?
Most businesses will have a petty cash fund that covers small, one-off business-related purchases. However, these small purchases must be accounted for. Understanding how to manage and record petty cash transactions is vital to avoid accounting headaches.
What Is Petty Cash?
Petty cash refers to a small amount of cash that companies keep to purchase small-ticket items. Petty cash funds are typically used when items cost so little that paying for them by cardor check doesn't make sense. This could include low-cost purchases like snacks for a meeting or a bottle of wine to celebrate a business milestone.
Petty cash is different from cash on hand, which refers to a company’s cash and liquid assets in the cash register and the business’s bank accounts.
Recording petty cash expenditures is an important aspect of bookkeeping for beginners. Some small businesses designate an in-house bookkeeper. However, other small business owners invest in outsourced bookkeeping services to free up valuable time and make sure every business expense is recorded correctly.
How Much Petty Cash Should I Keep on Hand?
The amount you keep in your petty cash account will depend on the size and nature of your business. Small businesses might keep as little as $50 on hand while a larger company with various outgoings should consider having at least $150.
Some business owners also have a separate discretionary petty cash pot. This money is available for a manager or supervisor to use at their discretion. It could be used for items that weren't budgeted for or to reward employees.
How to Account for Petty Cash
One person—the petty cash custodian—will typically be in charge of tracking petty cash and replenishing the fund when required. This role may look different from company to company. For example, some companies require petty cash receipts for disbursement while others use petty cash vouchers to itemize petty cash spending. Other companies may have a more laissez-faire attitude toward petty cash and only require a payment log.
Petty cash must be accounted for in your company’s financial statements. However, you only need to record an amount when the custodian requests more funds, not each of the individual items purchased with petty cash.
Petty Cash Accounting Best Practices
Monitor your petty cash balance as there's potential for abuse when cash is freely available. Minimize opportunities for abuse by:
Setting limits for the amount that can be disbursed through petty cash
Requiring justification for all spending
Require monthly audits by a person other than the designated custodian
When the petty cash drawer runs low, the custodian must request somebody to cash a check or withdraw cash from the business’s bank or ATM. Your accountant will track this as cash flow in the system by designating it to a general ledger account called "petty cash."
What Does the IRS Say about Petty Cash Best Practices?
The IRS recommends making out a petty cash slip and attaching it to the receipt. This will serve as proof of payment and streamline your bookkeeping processes.
What Are the Pros and Cons of Petty Cash?
Petty cash is a convenient way to purchase small-ticket items, but accounting for it can become complicated. These are the main pros and cons of petty cash:
Pros of Petty Cash
It's an easy way to cover impromptu expenses, for example tipping a delivery guy.
It saves the hassle of reimbursing employees and expecting them to pay upfront for work-related expenses.
Petty cash is a convenient way to cover everyday expenses like milk or snacks.
Having cash on hand helps in an emergency, for example when you run out of change in the cash register (though this shouldn't be a habitual practice).
Cons of Petty Cash
Paying for work items with cash isn't secure and is difficult to track. Lost receipts for items purchased make it difficult to justify the amount of petty cash spent.
Filling in a petty cash voucher every time you need funds is a time-consuming way of paying for small, work-related expenses.
Accounting for petty cash can be arduous.
Petty cash is seen as an outdated practice. Business transactions are increasingly cashless, and using alternatives like cards and digital wallets makes transactions more traceable and the petty cash fund less vulnerable to theft.
Manage Petty Cash Responsibly
Petty cash funds allow employees to make small purchases without the hassle of filling in an expense report or paying out of pocket for work-related expenses. It’s also fairly easy to record petty cash in the books as the items purchased with petty cash don’t need to be substantiated individually.
To make petty cash work for you, it’s essential to establish clear procedures to ensure the honest handling of these funds. A small business bookkeeping and accounting professional can help you manage petty cash effectively.
