The custodian can review the provided purchase receipts and completed vouchers to determine how much cash they must request to replenish the fund to its starting balance. Depending on the organization’s structure, this request may be submitted to the cashier or accounting team. However, organizations must establish clear controls and guidelines for how petty cash will be used and monitored to prevent abuse or misuse. In this guide, we’ll cover what petty cash is, what it’s commonly used for, and best practices for proper management. The English word ”petty” derives from the French petit, which means ”small” or ”little.” Likewise, ”petty” means minor or insignificant. So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills.
What type of account is petty cash?
- Debit balance on the Cash Over and Short account (income statement) represents a shortage (expense), whereas a credit means an overage (revenue).
- These expenses might include small office supplies, employee reimbursements, or incidental travel costs.
- As you would with your business’s more significant finances, you’ll want to keep accurate records of where the money is coming from and going.
- It’s a useful tool for your employees to make small purchases without having to requisition money, use a company debit or credit card, or have a check cut for them.
Even though we are becoming more digital, there’s always a need for petty cash. You never want to find yourself or your staff member in a bind because no physical cash is lying around for those “just in case” moments. Accountants don’t create a journal entry each time an employee makes a purchase using petty cash. Instead, they only make a journal entry when they disburse additional cash to the custodian upon their request. To avoid the abuse of petty cash and ensure proper recording of these transactions, here are some expert tips petty cash and best practices on how to set up and manage this fund.
Leadership Team
- In modern-day organizations, Imprest Funds is often handled by a designated individual, known as the Imprest Funds custodian, who ensures proper utilization and records every transaction.
- Small businesses might maintain a fund of a few thousand rupees, while larger entities may set aside higher amounts to meet more frequent or varied expenses.
- A petty cash fund enables you to make cash payments when necessary, which can be particularly beneficial when dealing with local or independent suppliers.
You can recall the example of the yogurt company that ran out of milk when the next shipment was not coming before 48 hours. Having enough petty cash funds helped the employees make instant decisions and meet the business’s emergency needs. Pre-set SOPs and request the authorized individuals to pay cash for expenses; no other requisitions or approvals are required in petty cash funds. Custodians are responsible for maintaining and overseeing the petty cash funds. Certain internal control procedures are also implemented to ensure that petty cash fund abuse is not prevalent. 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.
They make it hard to keep records
Petty cash may not be subject to the stringent internal controls that p-cards or other purchasing methods are. However, companies may still impose certain rules and requirements for how it’s used and managed. Employees using petty cash to make a purchase may not be subject to the same rigorous approval process as they would when using the company card or submitting an expense report for reimbursement.
- Regularly reconciling the physical cash reserve with the petty cash remaining balance log is a crucial step in ensuring the integrity of your financial records.
- Petty cash helps businesses keep their operations running without any hiccups.
- Understanding petty cash is essential for effective financial management in your business.
- Certain internal control procedures are also implemented to ensure that petty cash fund abuse is not prevalent.
- Ananya heads to her desk and opens the petty cash box—allocated specifically for urgent, small-scale needs like this.
- Replenishing a petty cash fund requires precision and adherence to financial protocols.
It works well to cover small impromptu expenses—like a tip for the kid delivering pizzas to the lunch meeting, or cab fare home for employees working late. It saves the hassle of reimbursing people or expecting them to pay out-of-pocket for work-related items. The custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, and dispensing funds. Before you start using petty cash, add a petty cash policy section to your employee policies and procedures manual.
Setting Up a Petty Cash Log
And the amount of cash you have in your storage box or drawer should be the same as the current balance of the account. However, on corporate financial statements, petty cash is listed in the ”Cash and cash equivalents” section of the balance sheet. The more documented petty cash expenses, the more your deductions, and the lower your business tax bill.