What if you could, with a single tool, safely distribute and efficiently track all your branch petty cash expenses and prevent cash leakage? Petty cash funds are very flexible and come in handy for legitimate and legal business expenses. If you’re a small business owner, it’s important to understand how petty cash can be used so you can account for it correctly in your books. But if you find that most of your petty cash is not being used, the fund amount might be too large. You should deposit the surplus petty cash into the company bank account.
Maintain the Initial Amount
Ananya knows the importance of accountability, so she collects the receipt from the IT technician and logs the expense in the petty cash register. This way, every rupee is accounted for, and she ensures the balance in the petty cash fund matches the remaining cash. While the amount of money might be small when dealing with petty cash, there should still be a record of every petty cash transaction. Petty cash, while seemingly simple, demands meticulous management to ensure financial accuracy and prevent fraud. You need a dedicated custodian, someone who is responsible and trustworthy. This person will be in charge of disbursing cash for authorised expenses, collecting receipts for every transaction, and keeping accurate records of all activity.
Storage of Receipts
Any time a member of your team takes some petty cash for a purchase, they should record it in the log book with details about how much was taken and the purpose, for example. After the money is spent, a petty cash receipt should always be given to accounting in order to aid the petty cash reconciliation process . Meet Ananya, the office manager at Summit Tech, a mid-sized software company. Her role involves ensuring smooth operations of the office, which often includes handling unexpected expenses. On a regular Tuesday morning, she receives a call from the IT team—one of their monitors has stopped working, and it’s causing a bottleneck in completing an urgent client project. However, raising a purchase order through Summit Tech’s corporate system would take at least two days for approval and fund release.
- The petty fund amount, therefore, is now back to the authorized amount worth INR 100.
- This liquid fund ensures business continuity for minor business expenses, preventing delays and maintaining smooth operations.
- Receipts or invoices should support each transaction to verify its validity for tax purposes.
- At any given time, the records should show all purchases that have already been made, how much cash has been taken and what the purchases were for.
- Creating, maintaining, and enforcing a robust petty cash management system establishes vital internal controls.
Record of Receipts
Preset spending limits on the prepaid cards can also be modified by you to take into account sudden requirements or emergency expenses. You can see every expense made with prepaid cards in real-time and make business plans accordingly. This real-time visibility also allows you to analyze expenses and take steps to optimize your operations.
How do you balance petty cash in accounting?
There are many safer and more convenient alternatives for small purchases. Petty cash is the small amount of money kept readily available by a business for nominal, incidental expenses such as office supplies, snacks, client lunches, social occasions, etc. While most businesses usually have a strategy for managing general expenses , petty cash is often too small to be taken seriously. In the UK, the HMRC sets rates for things like meal and mileage expense claims , but your company may not specify a number. This also means that proper petty cash handling, even without receipts, is important for financial statements in case of an audit.
- The journals providing more cash to custodians are debits and credits to cashiers.
- So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills.
- Whenever a small amount is utilized to settle expenses, it must be replenished.
- These receipts can be exchanged for a new check made to cash the total amount equal to the receipt.
- Given these challenges, many businesses are switching to technology to streamline their petty cash management.
- On the other hand, as this cash is readily available, it does raise suspicion about cash security and theft.
Though not literally cash, it’s money that can be easily and quickly accessed, which is why it’s «on hand.» The petty fund manager can be assigned to fund the cash drawer and write a cheque to create the appropriate accounting entry. Accounting is responsible for distributing cash and collecting receipts for all purchases or funds. If the total amount of petty cash decreases, the revenue will increase and added to the total amount withdrawn. The dual process keeps the petty cash funds safe and makes them accessible only to authorised individuals by having a petty cashier.
It’s also crucial to consider how your business operates and what it needs to function efficiently. Setting a limit on petty cash funds and specifying replenishment levels can help maintain control and prevent fraud. By regularly reconciling petty cash funds in your organization, you can avoid inefficiencies and unauthorized use. For some organizations, monthly reconciliation works for small businesses, whereas for large organizations weekly reconciliation can get the job done for others.
- Petty cash or a petty cash fund is a small amount of money available for paying small expenses without writing a check.
- It can be in the form of actual money, like amounts you haven’t yet deposited in the bank or smaller bills and coins that you keep in the cash register to make change for customers.
- Develop a petty cash policy to inform employees about the reimbursement process and what constitutes a petty cash expense.
In these cases, the custodian should tally and summarise the receipts. These receipts can be exchanged for a new check made to cash the total amount equal to the receipt. Once the check is cashed, this amount will be added to the petty cash fund to restore the funds to its original level. Once you begin creating the petty cash float, your petty cash account book entry will show a debit of the amount deducted to your petty cash fund.
Most companies tackle the handling of petty cash with a petty cash log book of sorts; maybe an Excel or paper spreadsheet, or notebook that people tend to doodle in. Essentially some place to record how much has been removed for purchases. Luckily, there are some software alternatives (we’ll get into that later) to avoid things getting lost. Companies will need to set money aside in their yearly or quarterly budget to build a petty cash fund.
As the cost of writing, signing, and processing the checks take a lot of time, companies prefer paying in cash on the spot for a smaller amount. In addition, the companies appoint custodians who are responsible and accountable for making sure these cash entries are accurately completed and reconciled at regular intervals. By having a petty cash cashier and a petty cash custodian, the dual-process helps to keep the funds secure and ensure that only those authorized have access to it. The journal line entry is recorded in the excess / deficiency inventory account if there is a shortage or excess. When you run out of petty cash, you get a credit representing your victory. If money is tight, the organisation posts a charge to represent the loss.
Role of Automation in Petty Cash Management
Petty cash is commonly used for minor expenses such as purchasing office supplies, covering small repairs, and reimbursing employees for out-of-pocket costs. It simplifies the process for these transactions while requiring careful tracking to ensure accurate financial records. A petty cash transaction is recorded on financial statements even when it is already in use. The expenditures or purchases made using these cash amounts are not part of the journal entries. The journal entry, however, is only made when the custodian needs more cash than what has been approved by the company. The journal entries are made when the custodian receives new funds in exchange for the receipts.