- November 10, 2018
- Posted by: Rivero, Gordimer & Company
- Category: Business Advice
Whether you’re a solopreneur, a small business owner, or a manager of a large organization, you’ll likely face situations where you may need extra cash on hand for small, last-minute expenses.
Sometimes, it can be easier and more convenient to make one-off purchases using cash instead of writing a check or using a company credit card. It’s at these are the times that petty cash can become helpful.
While petty cash purchases are typically smaller expenses, they should still be tracked and managed properly. Tracking petty cash transactions is an important part of efficient bookkeeping, and it can also have an impact on your ability to take advantage of every possible tax-deductible for your business.
With that in mind, let’s take a look at how to manage petty cash funds effectively.
Why Petty Cash is Important
In today’s increasingly cashless society, many small business owners are questioning the need for a petty cash fund. With mobile apps, digital wallets, and other electronic payment methods, cash is becoming less important to business operations.
Despite the trend toward a cashless society, keeping physical cash on hand still has its benefits:
- Having petty cash on hand for specific expenditures allows employees to make purchases without the red-tape of requesting approval for every minor transaction.
- It reduces the likelihood that employees will reach into their own pockets to pay for small expenses, which eliminates requests for reimbursement.
- It simplifies bookkeeping by consolidating multiple petty cash receipts into a single journal entry.
Setting up Your Petty Cash Fund
Your approach to setting up and managing a petty cash fund will depend, in part, on the size of your business. While smaller business might only need a single source of petty cash, larger organizations with multiple departments or physical locations might require separate petty cash funds for each division.
In any event, there are some basics to keep in mind when setting up a petty cash fund system:
- In your Chart of Accounts, create a new account for your petty cash fund.
- Write and cash a check from your company’s account to “Petty Cash.” (This amount will depend on your business and your specific cash needs.)
- Create a designated location within your office for the petty cash from the check you just cashed. Make sure the location is safe and secure.
- Designate which individuals are authorized to access the petty cash fund. The fewer individuals with access, the easier it will be to track petty cash transactions, ensure that the funds are used appropriately, and keep the funds secure.
- Determine which employee or employees are responsible for recording the petty cash transactions and/or replenishing the funds, and train those employees to provide receipt documentation for all petty cash transactions.
- Create a list of acceptable petty cash expenditures and establish a dollar limit for petty cash transactions.
- Make journal transactions and use the approved receipts to reconcile the petty cash account.
Managing Your Petty Cash Fund
Your accounting responsibilities begin the moment you issue and cash the first petty fund check. From that moment forward, every dollar that comes out of the fund should be tracked. Any time money leaves the fund; it should be in exchange for a purchase receipt provided by the employee who used the petty cash.
Transactions made using petty cash funds should be recorded at or near the time they are made. Receipts should be kept for every purchase and attached to any paperwork or documents related to corresponding expenditures. These receipts will be used to input journal transactions, and are an important component for tax purposes.
At any given time, the cash and receipts in your petty cash fund should equal the original amount of the petty cash funds. For example, let’s suppose you’ve decided that your fund will total $250. If the fund contains $50 cash, there should also be $200 of receipts in the petty cash fund.
Once the cash balance in your petty cash fund is too low to cover typical expenses, the petty cash fund manager will need to collect the receipts and replenish the funds to the desired level by cashing a new check written out to “Petty Cash.”
For bookkeeping purposes, there are two important journal entries that must be made during the replenishment process:
- An entry to record the petty cash expenses.
- An entry to account for the new check that was issued.
Although petty cash transactions may seem insignificant, they do add up over time, and implementing a petty cash fund policy that follows proper accounting practices can help you save money in the long run.
If you’re looking for other accounting tips to help with tax season, contact Rivero, Gordimer & Company, a CPA Firm in Tampa, Florida.