It is typical for businesses to experience small expenditures which cannot be justified by a need to undergo the procurement or payment process due to their insignificance and immediacy. Examples include postage, stationery, parking fees, travel within a city, and minor maintenance. The petty cash system allows an organization's employees to have immediate access to a certain sum of money kept in cash form. While sums may not necessarily be very large, improper management can result in errors in accounting, excess expenses, and misuse of funds.
In this blog, we will discuss petty cash control including what petty cash is, how to set up and control a petty cash fund, its benefits, and the most frequent mistakes companies make when dealing with it. Properly setting up petty cash control requires appointing a petty cash custodian, keeping records of all transactions, setting proper expenditure limits, reconciling funds, and reviewing them periodically.
What Is Petty Cash and Why Does It Matter?
Petty Cash is a small fund of money in the form of cash which a company retains for paying out petty expenses of the business. Rather than going through the procedure of preparing a purchase order or requesting a small reimbursement through the usual accounts payable process, this money can be used by a designated employee.
Understanding the Purpose of Petty Cash
Petty cash is meant to facilitate small expenditures that happen often or need immediate payment. Common petty cash transactions may include postage charges, purchase of small office supplies, parking expenses, local transport fare, minor maintenance work, among others. The specific expenses to be incurred through petty cash will depend on the organization's internal policy.
The petty cash will usually be stored in a cash box, drawer, or any other secure place assigned to the petty cash custodian. The custodian will be responsible for securing the cash, recording disbursements, retrieving receipts, and replenishing the cash when the limit is reached.
Why Proper Management Is Important
The small amount of a petty cash expenditure is not reason enough to consider this a negligible process from an accounting standpoint. Several such expenditures can add up to form a significant cost, and unrecorded transactions will result in less accurate financial reports. Poor control over the process may also increase the chances of any fraud or unauthorized use being carried out.
Properly controlled petty cash fund provides an audit trail of each withdrawal made. Companies can impose a ceiling on expenditures, mandate receipts, limit accessibility, and reconcile actual cash with recorded amounts. All these steps facilitate accurate bookkeeping without sacrificing convenience.
How to Set Up and Manage a Petty Cash Fund
It is not difficult to set up a petty cash system, but it is necessary to be consistent. There are many factors that businesses need to consider when setting up their petty cash systems.
Determine the Fund Amount and Assign a Custodian
The opening balance needs to take into consideration the requirements of the firm in terms of making small cash payments. A firm that makes few cash purchases might require a small amount of money, whereas a firm which incurs many incidental payments might require more. An unnecessarily high fund means there will be more money at risk.
A suitable employee should then be designated as the petty cash custodian. It is the responsibility of the custodian to make payment only for authorized purchases, keep records of the transactions, keep the receipts, and take care of the rest of the cash.
Establish Clear Rules and Spending Limits
The policy document of petty cash should detail the types of expenses that qualify for petty cash, the maximum withdrawal for individual expenses, who approves the expenses, and the documentation needed. There should never be personal expenses, and employees need to know that there should always be a business purpose for every expense.
It would also be good for businesses to outline how the employees apply for petty cash and return their receipts. This could be through a petty cash voucher that includes the date, name of employee, amount, purpose, type of expense, and approval.
Record, Reconcile, and Replenish the Fund
Every withdrawal needs to be documented immediately rather than waiting to remember it at a later time. Documentation and receipts must be kept along with the petty cash documents so that the firm will be able to prove where the money went. The amount of physical cash plus expenses incurred but not reimbursed must add up to the allowable fund balance.
If the fund is running low, the custodian can provide the transaction documents and receipts and ask for replenishment. The accounting department must validate the documents before replenishing the fund. Reconciliation will ensure that the receipts are not missing, the amount is wrong, there are duplicate entries, or unexplained shortages.
Benefits, Controls, and Common Petty Cash Mistakes
A good petty cash system management will increase efficiency, but at the same time, provide control over the processes. Nevertheless, companies should constantly monitor their functioning and decide whether to keep such a fund or not.
Key Benefits of Effective Petty Cash Management
The first advantage is that of convenience. It becomes easy to pay for legitimate small costs without having to go through long procurement or accounting procedures. This works well where it is necessary to make payments immediately and where the amount involved is not very large.
Control measures also help in maintaining transparency and managing costs better. With every expenditure properly classified and recorded, the management will be able to see which expenses recur and whether they can be reduced or improved upon in terms of the purchasing procedure.
Common Errors Businesses Should Avoid
One of the most frequent errors made is not maintaining proper documentation for all transactions, even the smallest transactions should have some form of documentation such as a receipt or voucher. Lack of proper documentation leads to discrepancy between the actual cash and accounting records making it hard to tell whether the difference was due to any wrong doing or a mistake.
Using the petty cash account to incur expenditures which should be incurred using the normal procedures of purchasing is another frequent mistake. Another mistake is lack of restricted access to the petty cash account because having too many people involved in the process poses risks of losses.
Use Reviews and Internal Controls to Protect the Fund
The review should involve a comparison of the actual cash, receipts, vouchers, and bookkeeping records. Businesses can undertake these inspections as per a scheduled plan or on ad hoc basis whenever necessary. The aim here is to make sure that the actual cash along with the recorded transactions always justify the approved fund limit.
Similarly, proper access control measures must be ensured. Cash box should remain locked whenever it is not being used, and access to it must be allowed only to the custodian and the approved backup individual. In case there is any recurring shortage or abnormal expense, then management needs to find out the reason behind it.
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Petty cash control |
Purpose |
|
Designated custodian |
Establishes clear accountability |
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Spending policy |
Defines eligible expenses |
|
Receipts and vouchers |
Creates transaction evidence |
|
Spending limits |
Controls small-dollar purchases |
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Regular reconciliation |
Identifies discrepancies |
|
Restricted access |
Reduces loss and misuse |
|
Periodic audits |
Tests whether controls are working |
Although petty cash is still relevant in dealing with legitimate business expenditures in small amounts quickly, the ease of doing business must not compromise financial controls. Businesses must determine the right amount of petty cash to be maintained, assign a custodian, identify acceptable expenses, document all transactions, and perform regular reconciliations of the petty cash account. These are just simple steps that will prevent any transaction from being complicated and troublesome for the books.
Moreover, businesses must realize that as they expand, it may become advantageous for them to outsource bookkeeping services and accounting functions. Fino Partners can assist businesses in outsourcing bookkeeping and accounting services including accounts payable and more.
The Fino Partners provides outsourced accounting and bookkeeping support designed to help businesses maintain accurate financial records and efficient accounting workflows. Contact The Fino Partners to explore accounting support tailored to your business’s operational needs.
