What is Petty Cash and How Do You Use It?

Petty cash or cash at hand is defined as a small amount of money set aside to cover for minor expenses in the company without having to write a check. The payment can be used to reimburse staff members for small expenditures that don’t exceed $25.00, such as cab fare, office supplies, postage, etc. This saves time from filing and using up checks. Also, some retailers do not accept credit or debit card purchases for payments below a certain amount.

1. Setting up a Petty Cash Fund
2. How to Use Petty Cash
3. Keeping Record of Transactions
4. Taxes and Petty Cash

Setting up a Petty Cash Fund

The amount of money in a petty cash fund differs for each enterprise depending on how frequent the company makes small purchases. For some, $50 is sufficient while others may require $200 in their account. Usually, a business will reserve enough money in their fund to meet their monthly needs.

The following steps outline the steps to take when setting up a petty cash fund:

1. Start by determining how much money the business needs daily for small expenses and change for the customers.
2. Add a petty cash account to the charts of accounts.
3. Set aside some money for the cash on hand fund and put it in a cash drawer or a safe.
4. Keep records on expenses over some time to help you determine the maximum amount to keep in the fund.
5. Evaluate the cash on hand from time to time to ensure that it is enough to cover the company’s’ needs. The money may need to be reduced if there is always a significant amount of unused funds sitting in the account.
6. Replenish the cash fund once it is depleted.

How to Use Petty Cash

Petty cash should only be used for minor business expenses. Therefore, you must specify what the money can be spent on by developing a petty cash policy and ensure that the employees understand the procedure to avoid misuse. Cash should only be released for requests that fall within the following petty cash guidelines.

• Once there is a receipt that verifies a person being reimbursed, it needs to be stapled to the voucher. With this method, tracking types of expenditures made can be charged at various accounts.
• Have the disburse cash counted as well since it is significant to prove the amount of money being settled. The voucher should then be signed by the recipient of the dough so that it may be evident that the custodian did not have the coupon filled out and the corresponding amount of cash pocketed.
• Whenever your voucher has been completed, make sure that your custodian has updated the cash book by making sure the cash balance, date of expenditure, running cash balance have been updated.

When the drawer is to get an amount below the pre-set, he or she needs to add a check with the words “Petty Cash” and cash the check.

The petty cash fund needs to be replenished back to the approved amount as required, the fewer people who can access it, the better.

You need to give two people access to the petty cash fund. If you own multiple divisions with many such funds, ensure that in each division you have two people with access to it. One of them should have the responsibility of providing the fund. The other should be the responsibility of keeping the transactions updated.

In the cash disbursements journal, an entry should be made by the custodian. If your cash fund is for the amount of $100 then what is required is for you to debit the petty cash and credit the credit charge of which both are $100.

Have an expenditure list from the account of petty cash as you make them ensure that you have attached the list for each expenditure. To back your journal transactions, you need to make sure that you have debited expenditure and in the cash journal you have.

Keeping Record of Transactions

As you begin keeping a record of how much you have in the petty cash box, ensure that each payment is made. You will need the transactions list and petty cash slips so that in every transaction, you will record the date and mention the purpose it was meant for.

You need to specify your work as much as possible and make sure that your transactions are business related. It is not a must to keep track of change every day but at the end of each day, ensure that you have recorded your amount in the office fund drawer.

The difference with cash payments made by customers should tally with the total petty cash expenses from the drawer. As your office fund drawer gets below the pre-set amount, you need to determine the add to the drawer by having a check to cash in with the words “Petty Cash.”

Taxes and Petty Cash

The most significant part of the petty cash is the validation process of each transaction. Documenting one’s transactions is a way where business documents are used to keep track of the transactions. You need to have records that can support your deductions for the small business expenses.

All in all, the more documented expenses you have, the higher the deductions you will get for you to lower the business tax bill.

The petty cash is also referred to as the cash in hand. This means that there are small amounts of money kept on hand in a particular business. There are two reasons why the petty cash is to be kept:

• To ensure that there is a change for customers
• To pay for the small purchases where payment is required. An example can be food for the office.

With the petty cash on the imprest system, the initial amount of capital is put into an account, where it is drawn upon for a particular reason and purpose. If the account is to go down below a certain set amount, the system gets replenished.