Petty Cash Fund: The Complete Guide

Examples | Amount | Rules | Process | Templates | ... Everything you need to know

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Definition: What Is Petty Cash?

In short, petty cash is “shoebox money” for business expenses that are too small for using a company credit card or writing a check.

Examples: What Is Petty Cash Used For?

The 5 most common examples of small business-related transactions that a petty cash fund is used for:

Amount: How Much Petty Cash Is Allowed?

Even though a smaller petty cash float needs to be replenished more frequently, it is not advisable to leave excessive amounts of cash lying around the office.

The float amount can always be adjusted if and as required. In fact, the petty cash expenses should be monitored over time to determine the optimal float so that there is enough to cover the business needs without keeping an excessive amount of unused money idle in the petty cash fund.

Larger businesses that tend to have a separate petty cash fund in each division set the size of the float and purchase limit at each location based on the division’s specific requirements.

Pros & Cons: What Are Petty Cash Benefits and Alternatives?

Alternatives: What are the modern replacements for petty cash?

While petty cash as a general concept is still valid, physical currency is being rapidly eliminated from business premises and replaced with technology driven solutions, such as:

This includes credit, debit, prepaid, procurement, purchasing and other types of cards.

Some cards even offer cash back or rewards.

Most digital and mobile wallets can be connected to a company card, which means that we do not have to carry around a piece of plastic all the time.

Even when employees need to front their own business expenses out-of-pocket, mobile and online applications allow for prompt submission and reimbursement of expense reports.

Compared to the manual petty cash process, technology can save us a lot of time on the expense management and bookkeeping processes due to, for example:

Digital Petty Cash Management: Benefits - Examples
Key Benefit Benefit Explanation
Efficiency Capture expense receipts, sales tax, expense category and other information at the point of sale.
Automation Instantaneous transfer of data into an accounting system; faster reconciliation; easy replenishment of funds from company bank account.
Flexibility Custom spending limits and rules.
Controls Real-time online monitoring and insights.
Adaptability International use whenever required.

Benefits: Why Is Petty Cash Important?

Even in today’s increasingly cashless economy, there may still be some instances when it is not possible or sensible to pay for small business expenses with a check or company card because, for example:

Moreover, a petty cash fund provides flexibility, convenience and control around minor business expenditures:

Process: How Does Petty Cash Work?

Most businesses have a petty cash process in place to ensure that the fund is not mishandled and all transactions are accurately captured for financial statements and tax purposes.

The process includes a set of rules, policies, form templates, procedures and controls that a company uses to manage its petty cash fund.

Initial Setup

  • Custodian
  • Cashier
  • Location
  • Amount
  • Funding
  • Guidelines

Ongoing Management

  1. Reimbursement
  2. Records
  3. Reconciliation
  4. Replenishment
  5. Accounting
  6. Internal Control

Keep reading to find out how you can set up a solid petty cash process that is efficient and easy to manage >>>

Custodian and Cashier

In order to keep a tight internal control over the money, the access to the petty cash fund should be limited to two members of staff with clear separation of responsibilities:

Petty Cash Fund Management: Separation of Duties
Task Custodian (Person #1) Cashier (Person #2)
Cash Disbursement: Approving and dispensing funds for legitimate business expenses based on a company’s petty cash policy. Monitoring the use of the petty cash money to ensure efficiency (e.g., sufficient levels of cash in the fund) and compliance (i.e., petty cash policy and internal controls).
Transaction Recording: Keeping records of disbursements by documenting each cash disbursement with a voucher and collecting receipts for all purchases or any uses of the funds. Recording the petty cash transactions by making the appropriate accounting entries in a company’s general ledger based on to the receipts/vouchers collected by the custodian.
Fund Replenishment: Requesting replenishment of the fund when cash levels are low. Issuing the check to replenish the petty cash fund when needed.

The custodian is typically a bookkeeper or an administrative staff member with the appropriate training, who is present on the business premises most of the time.

A small business may have just one petty cash fund. However, a larger company may need a separate fund for each division (e.g., building, office or department), in which case two people per division will be provided with access to petty cash.

Secure Location

The custodian is also responsible for keeping the petty cash in a safe place, locked in a designated container–such as a lockbox, a lockable desk drawer, a file cabinet or a safe–placed in a designated location on a company’s premises from which it should not be moved.

The custodian and the business owner, CFO or Financial Controller should be the only individuals who have the key to the container.

Funding

1. Establishing Petty Cash Float

The initial petty cash float is created by issuing a check for the desired amount, cashing it and stowing the money in the designated petty cash container.

When the petty cash fund is established, a current asset account titled Petty Cash is added to the chart of accounts in the accounting system.

The transfer of cash from the bank account to the petty cash account is recorded as a general ledger journal entry that shows: debit Petty Cash and credit Bank Account.

Example: Petty cash was newly established and funded at $100.

Journal entry to record the establishment and funding of petty cash:

Establish Petty Cash Fund ($100): Accounting Journal Entry
Account Name Debit Credit
Petty Cash $100
Bank Account $100

2. Adjusting Petty Cash Float

As the business grows, it may need to increase the petty cash fund, in which case the journal posting would be identical to the first entry: debit Petty Cash and credit Bank Account.

Conversely, if the fund ever becomes too large for the needs of the business, the excess cash will be deposited back into the company’s bank account, and the exact opposite journal will be posted to reflect the transaction: debit Bank Account and credit Petty Cash.

The same accounting entry applies when it is finally time to close the petty cash fund.

Petty Cash Fund: Accounting General Ledger Journal Entries
Petty Cash Fund Change Debit Credit
Establishment (+) Petty Cash Bank Account
Increase (+) Petty Cash Bank Account
Decrease (-) Bank Account Petty Cash
Closure (-) Bank Account Petty Cash

Reimbursement & Records

Recordkeeping is a key part of the petty cash management system, where the custodian reimburses employees for expenditures made in exchange for a petty cash voucher with a receipt/invoice attached, and then enters each transaction into a log/book.

Every time someone requests money from the petty cash, the custodian of the fund will carry out the following steps:

Petty Cash Fund: Reimbursement Process - Step-by-Step
Step Custodian Action
1. Receipt: Collect a receipt or invoice from the employee (clearly stating the use of funds, how much was spent and when) or other documentation justifying the disbursement.
2. Voucher: Make sure a petty cash voucher is fully filled out and signed both by the employee receiving the money and the custodian disbursing the funds.
3. Box: Attach the receipt (1.) to the voucher (2.) and store them in the petty cash container with the cash.
4. Log: Record the transaction in a petty cash log (also known as cash book or cash daybook).

Petty Cash Voucher

A petty cash voucher, or a petty cash slip, is a form that is used to document payments from a petty cash fund by capturing the following particulars:

Petty Cash Log

For every disbursement transaction, the custodian also updates a petty cash log with the details from the voucher so that the petty cash can be reconciled, entered into the company’s accounting system, and finally included in its financial statements.

The log is one of the daybooks used in the double-entry bookkeeping system, also known as:

  • Cash log or petty cash log
  • Cash book or petty cash book
  • Cash daybook or petty cash daybook

The log may be a paper ledger or an electronic spreadsheet and in addition to the voucher information it also usually tracks the general ledger account being charged and the running total.

Sometimes, especially in very small companies, the stack of petty cash vouchers serves as a log and the transaction details are entered into the bookkeeping system directly from the vouchers themselves.

IOU

Some businesses allow their employees to get an advance out of petty cash in exchange for an IOU (“I owe you”) document, which includes:

  • Name
  • Amount
  • Purpose
  • Signature

After making the purchase, the employee returns with the receipt and any spare change to exchange it back for the IOU.

The log and the receipts will be used as part of the petty cash reconciliation process >>>

Reconciliation

Petty cash is periodically reconciled to verify that the remaining balance of the fund is equal to the difference between the initial balance minus the charges detailed on the disbursement vouchers, receipts and/or invoices for any petty cash transactions in the period.

Whenever a payment is made from petty cash, it is recorded through a voucher and/or a logbook, with a receipt attached.

As the petty cash balance in the box decreases, the amount of vouchers and/or receipts should increase correspondingly and add up to the total amount withdrawn.

These documents (= receipt + voucher + logbook) are then used to regularly verify the balance of the fund.

At any given time, the total amount of all reimbursed vouchers and/or receipts plus the cash left over in the box must match the original fund amount as well as the balances recorded in the petty cash log.

Any discrepancy is a result of an error or fraud and so should be investigated and rectified.

At a minimum, petty cash is reconciled on a monthly basis as part of the month-end close or more frequently, depending on a company’s transaction volume.

Replenishment

When the petty cash in the box runs low and the balance falls to a preset level, the custodian exchanges the reimbursement vouchers and/or receipts from the disbursements that depleted the fund for a new check that is equal to the total of the receipts/vouchers.

Once the replenishment check is cashed, the custodian adds the top-up money to the remaining currency and coins left over in petty cash box so that the original float level is restored.

The petty cash transactions are typically summarized and recorded in a company’s general ledger at the point when the fund is replenished.

Replenishment Debits/Credits

The debits are assigned to the expense accounts indicated on the petty cash vouchers/receipts. Since the replenishment check is drawn for a company’s checking account, the credit journal entry goes to the Cash account.

Notice that the Petty Cash general ledger account is typically not impacted by the expenses because the only entry to the Petty Cash account occurs when the fund is established/closed or increase/decreased.

If a company decides to record expenses as a credit to Petty Cash, then the balance of the Petty Cash general ledger account should tie to the actual amount of physical currency in the petty cash fund at all times.

Example:

Petty cash was replenished for a total of $29 receipts on hand that related to office supplies ($10.50), postage ($4.50), parking for a client meeting ($9), and food & beverage for a team meeting ($5). As the float is $100 but the cash remaining in the fund amounted to $70, a shortage of $1 was noted and also replenished.

Journal entry to record the replenishment of petty cash:

Establish Petty Cash Fund ($100): Accounting Journal Entry
Account Name Debit Credit
Office Supplies $10.50
Postage $4.50
Parking $9.00
Food & Beverage $5.00
Cash Short (Over) $1.00
Cash $30

Timing of Replenishment

Alternatively, the custodian may bring the vouchers/receipts to the company bookkeeper as part of the regular reconciliation process.

In any case, the petty cash fund should also be reconciled and replenished at the end of each accounting period so that the financial statements accurately capture the full float (balance sheet) as well as the expenses (income statement), which need to be recorded in the appropriate accounting period. Note that this is done in addition to replenishing the fund whenever it is running low.

The fact that the expenses do not require journal entries at the time of payment–but only when the fund is reconciled, reimbursed or at period close end–avoids the need for many small journal entries, which makes the whole petty cash process more convenient.

Cash Over/Short

Since in accounting total debits must equal total credits, a “Cash Over and Short” account is used for balancing entries when the float (i.e., the total initial fund amount) does not match the sum of the petty cash vouchers/receipts disbursed in the period.

Debit balance on the Cash Over and Short account (income statement) represents a shortage (expense), whereas a credit means an overage (revenue). A shortage may result from an error (e.g., mistake in calculating change), a receipt not provided by a vendor/employee, or theft.

Regardless of the cause, the fund needs to be topped up back to the float level.

Imprest System

Under the imprest system, the general ledger account Petty Cash constantly reports a debit balance equal to the preset imprest amount (e.g., $100) and remains dormant (i.e., no debits or credits) unless the company decides to adjust the original preset imprest balance.

Rules: Policy & Internal Control

Even though the petty cash fund is small, every businesses should set up a process that keeps track of the cash inflows and outflows to reduce the risks of misuse and misappropriation, such as:

For that purpose, create a system of policies, procedures and controls at every step of the petty cash process, including:

Petty Cash Process
Policy: Guidelines: Put the petty cash guidelines in writing (clear and concise) to ensure that the employees understand the conditions and procedure.
Safety: Keep the money in a lockable container at a safe location at all times.
Spend limit: Set a maximum limit on disbursements (e.g., no large, regular or frequent purchases).
Allowed expenses: Specify what can/cannot be purchased with petty cash, ideally with examples (i.e., only legitimate business expenses, no personal use).
Receipts: Request a receipt with certain particulars (e.g., date, vendor, clear description, amount) for all reimbursements or those exceeding a certain amount.
Authorized personnel: Custodian: Authorize only a limited number of custodians to approve disbursements, distribute the cash and collect receipts for uses of the funds.
Approval limit: Larger payments may require approval from someone other than the custodian.
Cashier: Authorize only a limited number of cashiers to issue the checks to fund and replenish the petty cash fund and make the appropriate accounting entries.
Separation of duties: The custodian and cashier should be different individuals.
Transaction tracking: Records: Document each cash disbursement with a receipt and/or voucher, as well as entries into a company’s cashbook and accounting system.
Forms: Use templates for petty cash vouchers and cash book.
Controls: Replenishment: Cashier verifies the vouchers/receipts attached to a replenishment request before approving the check as they should tie to the total amount withdrawn.
Imprest: Independent person confirms that the actual petty cash balance and receipts/vouchers add up to the original/imprest amount.
Expenses: Monitor the use of petty cash to ensure the funds are used for legitimate business expenses.
Periodic reviews: Audit: Get the end-to-end petty cash process audited by an independent individual.
Improvement: Adjusted the controls in response to any issues identified by process reviews in order to further reduce the risks.
Technology: Automation: Utilize technology to make the entire process as efficient as possible.

Financial Statements

How is petty cash reported on the financial statements?

Petty cash is a current asset reported as the first or second line item on the top of a balance sheet either on its own or combined with other cash accounts, with the total reported as “Cash” or “Cash and Cash Equivalents”.

Tax

While all this may sound like too much work to maintain such as small pot of money, the petty cash expenses are typically tax deductible just like any other business expense–and they can add up.

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.

Hence, documenting all of your petty cash transactions maximizes the opportunity to take advantage of the tax deductions available for those expenses.

The tax authorities can provide you with the relevant information applicable to your specific circumstances, such as the IRS Publication 583 in the United States.

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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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