What Is a Change Fund and How to Account for It?

A change fund is a dedicated amount of cash used by businesses to facilitate transactions requiring change. It allows companies to provide customers with the correct amount of money back when they pay with cash. This separate cash reserve is distinct from daily sales revenue, functioning as a fixed, initial sum that remains constant unless deliberately adjusted.

Understanding a Change Fund

Maintaining a separate change fund is important for operations that accept cash payments, such as retail stores, restaurants, or service providers. It enables smooth customer service by having sufficient smaller denominations for transactions. This practice also simplifies financial tracking, as the initial fund is kept distinct from daily sales, preventing commingling of funds and aiding accurate revenue reconciliation.

Establishing a Change Fund

Setting up a change fund begins with determining the appropriate initial amount, which typically ranges from $50 to $200. This amount depends on the business’s daily cash transaction volume and typical transaction sizes. For example, a high-volume business with many small cash sales, like a coffee shop, might need a larger fund than a specialized service provider. The initial cash can be sourced by withdrawing funds from a business bank account or by allocating capital from the owner’s investment.

From an accounting perspective, establishing a change fund requires creating a distinct asset account on the balance sheet, labeled “Cash – Change Fund.” This separates the fund from other cash accounts and indicates its purpose. Physically, the fund is typically placed in a secure cash register drawer or a dedicated, lockable box at the point of sale. Before daily operations commence, the physical cash must be counted and verified against the recorded accounting amount to confirm accuracy.

Daily Operations and Reconciliation

During daily operations, the change fund is used for providing change to customers and is kept separate from incoming sales revenue. As transactions occur, money from the fund is dispensed, and customer payments are collected separately as sales. This separation helps maintain the integrity of the initial fund and daily sales figures. Minor overages or shortages in the change fund can occur due to human error, such as miscounting change.

At the close of each business day or shift, a reconciliation process is performed. This involves counting the physical cash remaining in the change fund to confirm it matches the initial established amount. Any discrepancies, whether an overage or a shortage, are carefully documented and recorded, often in a daily cash report. These small differences are typically accounted for in a separate “Cash Over/Short” expense or revenue account on the income statement. When not actively in use, the change fund is secured, usually by being placed in a safe or a locked vault to protect the assets.