Your postage machine just stopped working, and you need to send one of your employees to the post office fast to get some stamps. The only problem is she has no cash and her credit card is maxed out.
That’s where petty cash comes in. Petty cash is the money you keep on hand in your business to pay for small expenses such as emergency trips to the post office, beverages for unexpected visitors, or to reimburse your receptionist for picking up donuts for the staff meeting this morning.
Most small businesses keep between $100 and $200 in petty cash to pay for these and other unexpected expenses. If you’re ready to set up a petty cash account for your business, we’ll guide you through the process.
Overview: What is petty cash?
Petty cash is the money a business keeps on hand to pay for miscellaneous purchases. Most purchases made with petty cash are unexpected expenses that can pop up, such as morning coffee for a meeting or dinner for an employee working overtime.
One of the main reasons to have petty cash on hand is to quickly reimburse employees who have spent their own money on items for the business or to tip the delivery service driver who brought the office lunch.
Petty cash, like any other expenditure, needs to be accounted for properly in your accounting software or manual accounting system since the expenses are business related and need to be properly recorded to ensure financial statement accuracy.
An example of petty cash
On her way to the office, Jane receives a phone call from her boss asking her to stop and pick up some donuts for an unexpected meeting later that morning. Jane doesn’t have a credit card and has only $25 to last her until she gets paid.
Jane stops to pick up two boxes of donuts, leaving her with $5 in her wallet. Fortunately, her office has a petty cash fund, which her boss immediately reimburses her from, so Jane doesn’t have to submit an expense report and wait for weeks to be reimbursed.
Petty cash is typically spent on:
- Coffee and other beverages
- Office snacks such as fruit and pastries
- Emergency office supplies
- Employee reimbursements
How to set up and use petty cash in your business
If you’re ready to set up a petty cash fund for your office but aren’t sure where to begin, follow the simple steps below to have your petty cash fund operational in no time. To begin, have a secure place to store your petty cash funds, such as a lockbox or locked drawer.
1. Set account limits
Before you start a petty cash fund, you’ll need to decide how much you want the fund to be. Between $100 and $200 is fairly common, though you can go lower or higher, depending on your business.
You’ll also want to decide the replenishment point, which is where your expenses are recorded, and a new check is written to bring the petty cash total back to its original amount. For example, if your petty cash fund is $100, you may want to reimburse the fund when it drops below $15.
2. Determine who will manage petty cash
If you have an office manager, they’re the most likely choice to manage the petty cash fund. If you only have a few employees, fund management may fall to you.
Whatever you decide, it’s important that only one person have access to the fund at any time, to avoid unaccounted for withdrawals and/or theft. Once you determine who will handle petty cash, you’re ready to cash a check and deposit the funds into the petty cash lockbox.
3. Create a log
The petty cash log is one of the most important components of managing petty cash. Any transactions made into or out of petty cash need to be recorded on the petty cash log. It’s also important that any money disbursed out of the petty cash fund have a receipt.
For example, for Jane to get reimbursed for the donuts she purchased for the meeting, she needs to provide a receipt. The receipt will be used later as back up for recording the petty cash transaction as an expense in your general ledger.
|Date||Details||Cash In||Cash Out||Balance|
The petty cash log should include the date, details of the transaction, the cash you put into petty cash, the amount distributed, and a running balance. Once your running balance hits your replenishment amount, you’re ready to write a check to bring the petty cash total back to the original funded amount.
4. Reconcile and record petty cash expenses
When your petty cash fund starts to run dry, it’s time to record the expenses and reimburse the fund. To reconcile, you’ll need to match your receipts with the amounts recorded on the petty cash form.
Your available cash should always match the amount recorded in your petty cash log. If it doesn’t, you’ll need to account for any cash over and short. Once the account is reconciled, you’re ready to record your expenses into your general ledger.
|Date||Details||Cash In||Cash Out||Balance|
|8-3-2020||Postage||$ 7.25||$ 92.75|
|8-9-2020||Donuts for meeting||$12.25||$ 80.50|
|8-21-2020||Office supplies||$25.00||$ 45.00|
|8-25-2020||Coffee for meeting||$11.25||$ 15.50|
To record the petty cash transactions for August, you would need to record the expenses as a journal entry.
|Food and Beverage||23.50|
5. Reassess the petty cash fund periodically
If you find yourself going through petty cash rapidly, you can increase the amount of petty cash you keep on hand. Also, take a few minutes to see what you’re spending petty cash on.
For example, if you’re always buying coffee for the office, it might be a good idea to purchase coffee out of your regular funds, rather than depleting petty cash to purchase coffee every Monday for the staff meeting.
Petty cash can be a useful tool if managed properly
If you decide to set up a petty cash fund for your small business, there are a few things you can do to ensure that it runs smoothly, such as creating a petty cash policy that outlines what petty cash can be used for as well as any maximum spending amounts.
For example, you don’t want to use petty cash for high priced expenses, so it can help to set a dollar limit, such as $25.00. Anything over that amount would be paid for or reimbursed using other means. Making sure that any expense you reimburse has a receipt is also helpful.
While a petty cash fund may not be necessary if you work solo, if you have even one employee, it may be worth it to set up a petty cash fund to manage those unexpected expenses properly.