Many times businesses have to make small expenses instantaneously, and prior requisition is not possible. Similarly, a business can’t vouch and account for every small expense like a cup of coffee, taxi fare, smaller office supplies, etc.
Whatever the case, such expenses are unavoidable and have to be incurred. Therefore, most businesses maintain a small amount of cash on hand to meet the contingencies and the emergencies.
Many small businesses as well as large ones, use petty cash funds to manage their smaller expenditures. What is petty cash? How does it work?
What is accounting for petty cash? When should the petty cash fund be reimbursed? And is petty cash and cash on hand the same?
These are some commonly asked questions about the petty cash funds of a company. It’s true that a large number of businesses still manage the petty cash funds, petty cash drawers, and sometimes petty cash registers.
In this article, we will talk about petty cash, its accounting, reimbursement procedures, and a lot more. So let’s get into it without a further ado.
What Is Petty Cash Fund?
Petty cash funds are cash funds maintained by businesses to cover small miscellaneous expenses. The petty cash fund is commonly used by businesses for certain expenses for which check transfer or electronic fund transfer doesn’t seem to be an optimal or feasible option.
Companies keep a specific amount of cash for meeting their incidental expenditures. The maintenance of petty cash accounts eliminates the need to make an account for each and every expenditure. Whether small businesses or large corporations, petty cash funds are reconciled periodically for differences and transferred to financial statements.
Petty is derived from the term ‘petite,’ meaning small. The most common uses of petty cash are making change for customers, reimbursing cash to employees for expenses they have made for business, or funding other small purchases.
Petty Cash Vs. Cash On Hand
More popularly, common people understand petty cash and cash on hand as interchangeable terms. But do these two terms are actually the same?
Here is the answer.
Petty cash, as earlier defined, is the money or cash kept by the company to meet any emergency expenditures or contingencies that can’t be delayed and must be incurred in real-time. The definition of petty cash implies that the companies keep coins and bills to meet the incidental expenses, and petty cash is an alternative to credit cards and corporate cards.
On the other hand, when we talk about cash on hand, it’s a more generic term representing the company’s most liquid funds. The cash on hand deals with cash and cash equivalents. For instance, the financial accounting definition of cash in hand deals with money market funds, short-term debt instruments, cash equivalents, bank accounts(debit cards), etc.
Despite the more technical definition of cash on hand, it can be used as an internal system of the company that implies keeping cash(bills and coins). In that case, the difference between the cash on hand and petty cash will be as follows:
Petty cash refers to the cash available to employees for making business expenses and emergency expenses. Whereas the cash on hand represents the funds received from or reimbursed to the clients/customers, etc.
Management Of Petty Cash
Despite the theory portraying petty cash funds as easy to have and manage items for the company, it’s not the actual case. If petty cash funds are not managed properly and strictly, it can lead to a lot of problems.
Petty cash fund, made for convenience and a smooth line of action, is also exposed to several threats. Therefore, the following points are necessary for making petty cash funds more transparent and managed:
- Being stoled by the employees when not managed properly.
- With no operating standards, the employees might be using the cash for personal expenses.
- Audits are necessary to make sure that every transaction is organic and legitimate.
- There should be clear expectations and communication about who will be the custodian of the petty cash fund and what will be the procedure for getting petty cash funds.
What should you do for the management of petty cash?
Get started with SOPs Development
Development of standard operating procedures on how, when, who, and how much, will be a good start for the petty cash management system. Also, develop SOPs related to budget and reconciliation of the petty cash funds kept within the organization. Custodian, reimbursement procedure, issuance procedure, recording, and recognition for financial purposes also come under Standard Operating Procedures’ scope.
Budgeting For Petty Cash Funds
Not rigorous, but budgeting is required for petty cash funds like any other item or account of the business entity. It can be done by studying past patterns and cash expenses help in setting an appropriate limit of cash balance in the company. The budgeting process includes setting a limit for monthly petty cash funds necessary for the company’s contingencies.
Recording Petty Cash Fund
A petty cash fund is created for quick and convenient operations that might need to incur small cash expenses. However, you cannot ignore the cash fund itself. Therefore, make sure to make a record and keep receipt of every expense incurred from the petty cash fund.
Regular Reconciliation Of Fund
You must develop the reconciliation procedure and frequency when initiating a petty cash fund. Regular reconciliation doesn’t mean only aid in management but also detects any frauds or thefts in the use of petty cash funds.
Subtract the remaining funds from the month beginning to get the spent money. Match it with the recorded expenses. Any difference must be investigated and reconciled by the custodian. The reconciliation process should include tracking the remaining funds and adding the spent amount.
Security of the petty cash fund is also necessary to make sure that any unauthorized use or money abuse can be ditched. The company should take practical actions to limit the access to funds for everyone.
A custodian must ensure that only he has physical access to the money. And with the regular reconciliation, any discrepancy can be instantly taken care of,
When Should Petty Cash Be Reimbursed?
Now to the main point: when should petty cash be reimbursed.
Businesses follow the imprest system for managing petty cash funds. It implies that the company’s petty cash fund is funded with the allocated amount at the start of every month. The expenses are incurred from the account, and the balance remains at the end of the financial period.
Most commonly, the petty cash fund should be reimbursed on a monthly basis. The amount is transferred at the beginning of the month to the custodian. He makes expenses from the petty cash fund during the whole month. The companies do not wait for the complete replenishment of the fund before it’s financed again.
At the end of every month, the journal entries for expenses are made, and the balance up to the expenses of last month is reimbursed to the petty cash fund for maintaining the fixed level of petty cash.
Accounting For Petty Cash Reimbursement
Let’s further elaborate on the process of petty cash fund reimbursement with the help of journal entries.
At the end of every month, the following calculations are made by the custodian or petty cash manager:
Remaining Balance Of Petty Cash Fund = Beginning Cash –Total Expenses During the Month.
The following journal entries are made for petty cash reimbursement:
- Recording Of Expenses
- Reimbursement Of Cash to Funds.
Let’s do it with an example.
A company, ABC, had a petty cash fund of $4000 for managing the small and emergency expenses of the company. During the whole month, the following business expenses and emergency expenses were incurred:
Taxi Fare: $200
Staff Advances: $1800
Other Expenses: $500
When the month ends, the following entry will be passed into books of accounts:
|Date||Particulars||Debit ($)||Credit ($)|
|Taxi Fare Expense||200|
|Petty Cash Fund||2500|
|The expenses made from petty cash fund debited|
After recording the expenses and crediting the petty cash fund, the company will reimburse the account with cash or fund. The following journal entry will be passed when transferring $2500 to the petty cash fund for maintaining the level decided in the budget.
|Date||Particulars||Debit ($)||Credit ($)|
|Petty Cash Fund||2500|
|The petty cash fund is reimbursed at the start of the month.|
We have shared everything about petty cash funds, their management, and how and when to reimburse the petty cash fund for any company. We hope the information has helped you clearly understand the concept of petty cash funds.
You can also check our article on why businesses should use petty cash funds to manage their emergencies and contingencies.