Petty Cash: What It Is and Why Your Business Needs It

Petty cash is a common term in business finance. It is a small amount of cash kept on hand to cover small expenses. This system helps businesses handle minor costs quickly without needing formal purchase orders or checks. See what petty cash is, how it’s used, how much money is typically kept in a petty cash account, and how petty cash accounting works.

What is Petty Cash?

The meaning of petty cash is an amount of cash kept on hand and used for making small payments. These are usually small expenses that don’t require a formal purchase order or check. Think of it as the company’s “spare change” for things like office supplies, parking fees, or a quick lunch for a business meeting.

Small businesses and large corporations alike use petty cash because it makes day-to-day operations more efficient. Without it, employees would have to wait for formal transactions to cover minor costs, slowing down the workday.

Why is Petty Cash Important?

Having petty cash available helps businesses handle minor expenses quickly and easily. Petty cash meaning isn’t just about saving time; it’s about keeping things moving smoothly without paperwork for every little purchase.

For example, an employee might need to buy printer ink or pay for postage. With petty cash, they can do so immediately, without waiting for approval or making a formal purchase request. This keeps things simple and ensures that small costs don’t slow down operations.

What is the Usual Amount of Money Kept in a Petty Cash Account?

The amount of petty cash your business needs depends on how frequently small expenses occur. Typically, businesses keep anywhere from $50 to $500 in petty cash. Larger organizations might have larger funds, but the idea is the same: it’s a small amount of cash set aside for minor, everyday purchases.

When deciding what is the usual amount of money kept in a petty cash account, consider the size of your business, the frequency of small purchases, and how easily you can manage the fund.

How Does Petty Cash Work?

When a business keeps petty cash, it needs to be managed carefully. Here’s how it works:

Establishing the Fund

A certain amount of cash is allocated to the petty cash fund. For instance, a company might start with $100.

Tracking Expenses

When someone uses petty cash for an expense, they should keep a receipt and record the transaction. This helps with transparency and accountability.

Replenishing the Fund

Once the petty cash fund is low, it’s replenished back to the original amount. This is done by submitting a request to the finance department to top up the fund.

Recording and Petty Cash Accounting

Every petty cash transaction needs to be recorded. This is done in a petty cash journal to ensure that every expense is documented for later review. The IRS suggests using petty cash slips and attaching them to receipts to track and document petty cash expenses.

Petty Cash Accounting

Petty cash accounting is the process of keeping track of all petty cash transactions. It’s important because it helps businesses manage their cash flow and avoid misuse.

Two common systems used for petty cash accounting are:

1. Imprest System

With the imprest system, you set a fixed amount of petty cash (say $200). When the fund runs low, it’s topped up to the original amount. This system is simple and makes sure you always know how much money is available.

2. Fluctuating System

In the fluctuating system, the petty cash fund isn’t fixed. Instead, the fund balance changes based on how much is spent. This means the amount available in the petty cash fund can vary, depending on business needs.

Key Components of Petty Cash Accounting

Here’s a look at the most important steps in managing petty cash:

Recording Expenses

Every time petty cash is used, the expense should be recorded, including the amount spent, the date, and the purpose of the expenditure.

Reconciliation

Periodically, businesses should check the petty cash fund to make sure the cash on hand matches the records. This helps catch any mistakes or discrepancies early on.

Replenishment

When the petty cash fund is low, it’s replenished by submitting an accounting request. The amount spent should always be clearly documented to ensure accuracy.

Benefits of Petty Cash

Using petty cash offers several benefits to businesses:

Efficiency

Petty cash allows employees to take care of small expenses quickly, without waiting for approval or going through formal channels.

Control

Petty cash gives businesses better control over minor expenses, helping avoid unnecessary spending.

Convenience

Having cash on hand makes it easier to pay for small items like snacks, postage, or emergency supplies.

No Paperwork for Small Purchases

Petty cash eliminates the need for long approval processes for small, everyday expenses.

Risks of Petty Cash

While petty cash is helpful, it comes with some risks:

Mismanagement

If not properly tracked, petty cash can easily be misused or lost. This is why proper documentation and reconciliation are crucial.

Fraud

Without clear rules, employees might use petty cash for personal expenses. Regular audits and clear guidelines help prevent this.

Lack of Control

If petty cash is not tracked carefully, it can lead to unapproved spending or discrepancies.

How to Manage Petty Cash

Here are some steps to help you manage petty cash effectively:

Set a Fund Size

Decide how much money you need in the petty cash fund based on the types of small expenses your business has.

Assign Responsibility

Assign a person (like an office manager) to oversee the petty cash fund and keep track of transactions.

Establish Rules

Set clear guidelines on what petty cash can be used for and how much employees are allowed to spend.

Record Every Transaction

Every time petty cash is used, record the transaction, including the date, amount spent, and the reason for the expense.

Reconcile Regularly

Periodically check that the petty cash on hand matches the records. This helps catch errors and ensures everything is accounted for.

The Role of Petty Cash in Everyday Business Operations

Petty cash is a simple way for businesses to handle small expenses quickly. It saves time by allowing employees to make minor purchases without delays. However, to avoid problems like misuse or mistakes, businesses need clear rules and regular checks. When managed properly, petty cash helps businesses run smoothly without losing control of their finances.