What Is Petty Cash and How It’s Applied to Your Business?

Have you ever felt petty cash is more of a headache than a help? You’re not alone. Picture this: a team member needs quick cash for office supplies, but the receipts go missing, and nobody knows how much is left in the expense fund drawer.

What started as a simple system for small expenses becomes a black hole of untracked spending and unresolved questions. It’s a common struggle for many businesses: small errors pile up, accountability slips, and suddenly petty cash feels anything but ‘petty’.

But here’s the good news: it doesn’t have to be this way. With the right approach, you can turn change funds into an organized, well-managed asset that supports your business without the stress. Continue to read this article to understand what it is and how this fund affects businesses.

What Is Petty Cash?

A petty cash fund is a small reserve of company cash typically stored securely in a locked drawer or box. It is used to cover minor or incidental expenses like office supplies or employee reimbursements.

For those unfamiliar with petty cash meaning, it refers to a designated fund for handling small expenses that don’t require the use of checks or credit cards.

For instance, it might be used for quick purchases when essential items run out or for occasional expenses like doughnuts for meetings or birthday cards for team members. Although these expenditures are generally minimal, keeping track of them is important, and may even qualify as tax-deductible.

The small expense fund is periodically reconciled, with all transactions documented in the company’s financial statements. In larger organizations, individual departments may maintain their own petty cash funds.

Types of Petty Cash

Petty cash funds come in various types, depending on their intended use:

• General: Used for miscellaneous and occasional expenses.
• Imprest: A fixed amount of cash allocated for a specific period, with the balance remaining constant.
• Emergency: Reserved for urgent needs, such as restocking supplies or handling unexpected vendor payments.
• Discretionary: Available only for expenses pre-approved by managers or business owners.

For industries like construction, where unexpected costs frequently arise, integrating construction accounting software can help manage and track expenses more efficiently, including cash float allocations.

Requirements of Petty Cash

Using a petty cash fund may bypass certain internal controls, but its availability does not mean unrestricted access for anyone. Most companies implement strict internal procedures to manage petty cash effectively.

Typically, only a few authorized individuals can approve disbursements, which are limited to expenses directly tied to legitimate company activities or operations. A designated petty cashier is often responsible for issuing checks to fund the cash float and recording the necessary accounting entries.

Meanwhile, a petty cash custodian handles the distribution of funds and ensures receipts are collected for all purchases or expenses.

As a change fund is used, the amount of cash decreases, but the collected receipts should correspond to the total amount withdrawn. It’s a common practice that only authorized personnel can access the funds.

Recording and Reconciling Petty Cash

Managing petty cash effectively requires accurate recording and regular reconciliation to ensure transparency and control. Here’s how recording and reconciling petty cash work in practice:

1. Recording Petty Cash

When the fund is in use, transactions involving petty cash are still reflected in the company’s financial statements. However, accounting journal entries are not made at the time of purchase. Instead, entries are recorded when the custodian requests additional cash.

At this point, the custodian exchanges receipts for replenished funds, and the journal entry reflects a debit to the change fund and a credit to cash. These transactions can be organized in a special journal to streamline record-keeping and ensure clarity. This process is often part of petty cash reimbursement to maintain the fund.

Suppose there is a discrepancy in the fund—either a shortage or an overage—a journal entry is made to an over/short account. A credit is recorded for any overage to indicate a gain, while a debit is recorded for any shortage to reflect a loss.

2. Reconciling Petty Cash

The petty cash is periodically reconciled to confirm its accuracy. As the balance approaches a predetermined minimum level, the custodian requests additional cash from the cashier.

During this process, all receipts are totaled to ensure they match the amount of cash disbursed from the expense drawer. If additional cash is needed, the cashier issues a new check to replenish the fund and collects the receipts for the expenses that reduce the cash.

Reconciliation ensures that the remaining cash balance equals the original fund balance minus the total expenses documented by receipts and invoices. If the actual remaining balance is lower than expected, it indicates a shortage.

Conversely, if the balance is higher than expected, it reflects an overage. While minor discrepancies can occur, it’s important to identify and address the source of any imbalance to maintain accuracy.

For businesses in Malaysia, adopting ERP software Malaysia can simplify tracking and managing petty cash alongside other financial operations.

Petty Cash vs. Cash on Hand

What is petty cash, and how is it different from cash on hand? Although the two terms overlap, they are distinct. Of the two, “cash on hand” is the broader term.

• Petty cash specifically refers to physical money—coins and bills—that a company keeps readily available for minor expenses, often because it’s more convenient than using checks or credit cards.
• Cash on hand, on the other hand, encompasses any readily accessible funds a business has. This can include actual money, such as undeposited cash, or smaller denominations in a cash register used for making change.

Unlike petty cash, which is often reserved for small expenses, larger payments or reimbursements can be processed more effectively through digital solutions like invoicing software, ensuring proper documentation and approval.

Advantages and Disadvantages of Petty Cash

Cash float offers convenience for minor expenses but comes with certain risks and challenges. Understanding its pros and cons helps businesses decide how to manage it effectively. Below is an overview of the advantages and disadvantages of petty cash:

1. Advantages

Here’s a list of the advantages and uses of expense funds:

• Quick and simple payments: Cash is often the fastest and easiest way to cover expenses.
• Impromptu expenses: Useful for unexpected costs, such as tipping a delivery person or covering cab fare for employees working late.
• Avoids reimbursement hassles: Eliminates the need for employees to pay out-of-pocket for work-related expenses and seek reimbursement.
• Routine expenses: Handy for frequent, minor purchases like milk for the office, stamps, or cleaning supplies.
• Making change: Can be used in emergencies to make changes for customers if the cash register runs short (though this should not become a regular practice).

2. Disadvantages

While petty cash offers various advantages, companies must pay attention to the disadvantages of keeping it within them. Here’s a list of the downsides and risks of keeping an expense fund:

• Security risks: Cash is difficult to secure and cannot be easily tracked, making it susceptible to theft or loss.
• Potential for misuse: Even with a system of receipts or vouchers, it’s easy for cash to disappear without explanation.
• Additional administrative work: Maintaining petty cash funds, keeping accurate records, and reconciling them regularly requires extra effort, which can burden small businesses.
• Shift to cashless transactions: With the rise of credit cards, debit cards, payment services like Venmo or PayPal, and contactless options, petty cash is becoming less relevant.
• Criticism of being outdated: Many argue that cash alternatives are as simple to use while being more traceable, secure, and resistant to theft.
• Crime concerns for small businesses: Keeping cash on hand may increase the risk of theft or other criminal activity.

Manage Your Petty Cash Wisely with HashMicro Accounting Software

Managing petty cash effectively is essential to good financial management, but it’s not without its challenges. From tracking small expenses to reconciling funds regularly, businesses often find that traditional manual methods leave room for errors, inefficiencies, and potential risks.

With HashMicro Accounting Software, managing expense funds becomes a breeze. Say goodbye to tedious manual bookkeeping and hello to effortless automation! This smart solution handles everything from tracking petty cash to ensuring accurate reconciliations.

But does that mean this accounting software can only handle small cash funds? Of course not! This system is capable of so much more, such as:

• Petty Cash with Expense Voucher Management and Approval: Tracks petty cash disbursements via digital vouchers, ensuring transactions are documented and approved before funds are released.
• Cash Advance and Realization Management: Manages employee cash advances by tracking issued funds and reconciling them against actual expenses or unused amounts.
• Payment Voucher to Multiple Bills with Approval Matrix: Allows multiple expenses to be paid with a single voucher while ensuring all payments are approved through a structured workflow.
• Easy Bank Statement Reconciliation with Automatic Matching: Automatically matches bank transactions with journal entries, including operational cash replenishments, and flags any discrepancies.
• Comprehensive Treasury and Forecast for Cash Management: Provides real-time visibility of petty cash balances and integrates them into overall cash flow forecasting for better financial planning.
• In-Depth Accounting Reports (e.g., Journal Reports, Partner Aging, and Bank and Cashbook): Generates detailed reports that include cash reserve usage and its impact on financial accounts for better oversight and analysis.

Conclusion

Managing petty cash is essential for handling small expenses and maintaining smooth day-to-day business operations. However, without proper controls and accurate tracking, it can lead to inefficiencies and financial inconsistencies.

To make petty cash management effortless, HashMicro’s Accounting Software offers advanced tools tailored to meet your business needs. Its automated tracking, approval workflows, and detailed reporting eliminate the hassle of manual processes.

Why settle for outdated methods when you can revolutionize your financial management with HashMicro? From petty cash tracking to comprehensive analytics, this software delivers a smarter, more efficient way to manage your finances.

Try a free demo today and see how it transforms your business!

FAQ on Petty Cash

• How do I establish a cash float?

  To set up a cash float, determine an appropriate amount (known as a ‘fund’) based on anticipated small expenses. Withdraw this amount from the company’s bank account and store it securely. Designate a custodian to manage the fund and implement a system for tracking expenditures, such as using expense vouchers for each transaction.

• What types of expenses are suitable for an expense fund?

  An expense fund is typically used for minor, business-related costs that require immediate payment. Common uses include purchasing office supplies, covering postage costs, providing refreshments for meetings, or reimbursing employees for small out-of-pocket expenses.

• How can I ensure the security of a change fund?

  To safeguard a change fund, store it in a locked cash box or drawer with access limited to the designated custodian. Implement strict record-keeping practices, requiring receipts for all disbursements and regular reconciliations. Periodic audits by someone other than the custodian can also help detect and prevent misuse or discrepancies.

• Who should oversee the small cash fund?

  A designated individual, often referred to as the custodian, should be responsible for managing the small cash fund. This person handles disbursements, maintains records of all transactions, ensures receipts are collected, and performs regular reconciliations to verify the fund’s balance.