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Salt Lake City Bookkeeping Blog

How to Manage Your Petty Cash Fund

Posted by Leanne Armstrong on May 23, 2018 9:00:00 AM

How to Manage Your Petty Cash FundThere are some business purchases – think coffee runs, staff birthday cards, and one-off postage costs for example – where it’s impractical to pay by credit card or check. As a matter of fact, it was smaller business expenditures like these that first gave rise to the term petty cash! And they’re still the reason why most companies find it useful to keep funds on hand for minor, last-minute, or cash-only expenses.

But just because the dollar amounts flowing through your petty cash fund are typically minimal, that doesn’t make it any less important to manage them properly. Tracking petty cash transactions is part of an efficient bookkeeping system. Especially when it comes to maintaining accurate journal entries, keeping personal purchases separate from business, and capturing every possible tax-deductible expense.

Why Petty Cash is Important

Some business strategists have begun to question the need for a physical petty cash fund. After all, secure and streamlined purchasing alternatives like mobile apps, digital wallets, and even prepaid debit cards are making the practice of paying by cash obsolete.

Making it easier to spend, however, isn’t always a good idea when it comes to running a business. And keeping a certain amount of money on hand in the form of petty cash still offers some valuable benefits:

  • It limits discretionary spending, and can help to prevent a lot of smaller purchases from adding up to one larger annual expense,
  • it makes cash available to employees for certain authorized expenditures without the need to process time-consuming expense reports,
  • it reduces the likelihood that owners or managers will pay for purchases out of their own pockets, then forget to allocate those purchases as company expenses,
  • it cuts down on bookkeeping since multiple petty cash receipts get consolidated and processed as part of a single journal entry, and
  • it’s still more convenient in many situations to pay for a purchase in dollars and cents!

Whether your company takes care of its own business bookkeeping, or outsources those duties to an off-site professional, it’s in your best interest to understand what’s involved in setting up and accounting for a petty cash fund. 

Setting it Up

While smaller companies usually require only a single source of petty cash, some larger organizations will have separate cash funds for each of their various departments. In either case, to implement a petty cash fund you’ll need to:

  • set up a Petty Cash account in the asset section of your Chart of Accounts,
  • determine how much money your petty cash float should contain (usually one to several hundred dollars, depending on the size and needs of your business),
  • clarify which types of expenditures qualify for petty cash status, and make sure receipts are collected for every purchase,
  • allocate a secure location for your petty cash holdings (a locked cash box inside a locked drawer or cabinet is best), and
  • assign a custodian to disburse, record, reconcile, and safeguard your petty cash

This last is particularly important for keeping your bookkeeping under control - and because where there’s money, there’s also potential for theft and abuse. Much as we’d like to believe it doesn’t happen, stealing cash is one of the most common forms of employee theft.

Keeping it Balanced

Managing your petty cash fund successfully from an accounting perspective starts as soon as you issue that first check made payable to cash. If you’ve decided to carry a float of $200 for example, your journal entry will involve a debit of $200 to your Petty Cash account, and a credit of $200 to your regular Cash (Bank) account.

From there, every time your custodian doles out money from the petty cash fund, it should always be in exchange for a purchase receipt. That means that at any point in time, the money and receipts in your petty cash box will equal the starting amount of your float.

Once the cash balance in your fund gets too low to be useful, the receipts should be summarized, tallied, and exchanged for a new company check equal to their total. Cashing this check - and adding the funds to your petty cash holdings - will bring your float back to its original level. But there are two important bookkeeping steps required to complete the replenishment process:

  1. A journal entry to record the petty cash purchases (this consists of a debit to each of the individual Expense accounts involved - Postage, Office Supplies, etc. - and a credit to your Petty Cash account for the receipt total)
  2. A journal entry to account for the new check you’ve cut (as already discussed, this consists of a debit to your Petty Cash account, and a credit to your regular Cash (Bank) account)

They may be small, but petty cash receipts are important source documents for backing up your bookkeeping transactions. Be sure you keep and file them accordingly.

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Topics: Cash Flow, Outsourced Bookkeeping, Bookkeeping Procedures