A petty cash fund represents a small pool of available cash a company keeps on-site, typically in a secure location like a locked drawer or box, to cover minor or incidental expenses such as office supplies or employee reimbursements.
Key Takeaways
- Instant Accessibility: Petty cash provides easily accessible funds for minor expenses that don’t justify writing a check or using a credit card.
- Distributed Management: Larger organizations may allocate a petty cash fund to each department to streamline operations.
- Versatile Usage: Covers costs like office supplies, customer cards, employee meals, and reimbursements.
- Simple and Efficient: It offers a quick, easy-to-understand solution for small purchases.
- Associated Risks: Susceptible to theft, misuse, and requires periodic monitoring and balancing.
Unveiling the Convenience of Petty Cash
Petty cash provides an effortless method to handle small purchases and expenses where traditional payment methods are impractical. The amount sewn into a petty cash fund typically ranges from $100 to $500, adjustable to the specifics of the enterprise. Common uses include:
- Office supplies
- Greeting cards or flowers for clients
- Catered employee lunches
- Reimbursement of small employee expenses
A designated petty cash custodian manages the fund, ensuring compliance with company policies and handling the replenishment process.
Securing and Using Petty Cash
While petty cash can simplify small transactions, it can challenge internal controls. A well-guarded petty cash fund usually restricts access to pre-approved individuals handling legitimate business expenses.
Custodians are responsible for distributing funds, retaining receipts, and keeping the balances accurate. This dual-role system enhances accountability and protects funds from misuse.
Documenting Petty Cash Transactions
Despite being small-scale, transactions using petty cash are still documented on financial statements. Reports and entries are only made during replenishment processes, which follow a systemized sequence of debit and credit entries.
Shortages or surpluses are recorded to maintain balanced accounts, while the IRS prescribes using petty cash slips for constant tracking of such expenses.
Regular Reconciliation for Maximum Accuracy
Regularly reconciling the petty cash fund ensures accuracy against potential discrepancies. Custodians calculate all expenses before applying for additional funds, matching receipts with withdrawals to verify correctness. Replenishment involves balancing the total amount originally set, reducing errors or shortages.
Petty Cash vs. Cash on Hand: Navigating the Differences
The term “cash on hand” broadly encompasses any accessible funds, including loose coins and smaller bills. In contrast, petty cash details funds reserved for operational utility and internal expenses.
In accounting contexts, cash on hand also pertains to liquid assets such as checking account balances or other easily accessible investments. Essentially, all petty cash can be considered cash on hand, but not all cash on hand falls under petty cash.
Weighing the Pros and Cons of Petty Cash
Advantages:
- Convenience: Quick and easy when immediate payments are necessary.
- Emergency Use: Handy during emergencies or unexpected requirements.
Disadvantages:
- Security Risks: Vulnerable to loss or theft without meticulous tracking.
- Administrative Effort: Needs consistent oversight and balancing.
- Outdated Practice: Less necessary with modern cashless alternatives.
Petty Cash FAQs
What Is Petty Cash and Its Purpose?
Petty cash is designated for small expenses where formal payment methods are impractical, simplifying small purchases and reimbursements.
Origin Behind the Term “Petty Cash”
“Petty” derives from the French word petit, meaning small. Historically signifying minor expenditures, the term finds its first known usage in a housekeeping guide from 1678.
Common Examples of Petty Cash
Petty cash commonly covers:
- Snacks and beverages
- Greeting cards or flowers for special occasions
- Transportation fare
- Basic office supplies
- Occasional catered staff meals
Is Petty Cash a Cash Equivalent?
While petty cash itself is cash, cash equivalents involve security instruments that are swiftly convertible to cash, reflected collectively in financial statements without being interchangeable concepts.
Procedures for Balancing Petty Cash
Tapping petty cash necessitates documenting withdrawals with slips or vouchers. Reconciliation examines current amounts versus total receipts, ensuring it aligns with initial funds, normally conducted when replenishing the fund.
The Bottom Line
Despite technological advancements and evolving financial tools claiming conventional acceptance, petty cash remains a strategic aid for minor expenses, presenting unique, albeit monitored, daily ease for businesses.
Related Terms: cash on hand, float funds, cash equivalents, internal controls, financial statements.
References
- Internal Revenue Service. “Publication 583 (01/2021), Starting a Business and Keeping Records”.
- The Phrase Finder. “Petty Cash”.
- Accounting Coach. “How is Petty Cash Reported on the Financial Statements?”
- Accounting tools. “Petty Cash Accounting”.
