What Is a Petty Cash Account and How Do You Manage It?

A petty cash account provides a convenient way for businesses to handle minor, immediate expenses that are not practical to pay by check or electronic transfer. This fund serves as a small, accessible amount of cash kept on hand for incidental purchases. Its purpose is to facilitate day-to-day operations by covering small expenditures like office supplies, postage, or small reimbursements without the need for formal payment processing.

Establishing a Petty Cash Fund

First, a business determines the initial size of the fund, typically considering the frequency and average amount of small expenses it anticipates. This amount should be sufficient to cover minor costs for a set period, such as a week or a month, often ranging from $100 to $500.

Next, a specific individual is appointed as the petty cash custodian. This person is responsible for the fund’s safekeeping and for accurately tracking all transactions.

The fund is initially established by cashing a check made out either to “Petty Cash” or directly to the appointed custodian. This money is then placed into a secure location, such as a locked drawer or a small safe. A petty cash log or ledger is created from the outset to document every transaction.

Operating the Petty Cash Fund

When money is needed for an approved expense, the custodian disburses the required amount from the fund. For each disbursement, a petty cash voucher must be completed and signed.

This voucher serves as a record, detailing the date, amount, purpose of the expense, and the recipient of the funds. It also includes the custodian’s signature, confirming the transaction. It is important to collect a receipt for every expense paid from petty cash, as this provides external verification of the expenditure.

The total of the cash remaining in the fund plus the value of all completed vouchers and collected receipts should consistently equal the initial fund amount. This practice, known as the imprest system, helps maintain control over the fund and simplifies reconciliation.

Replenishing and Reconciling the Fund

Replenishment typically occurs when the cash balance runs low or at regular intervals, such as weekly or monthly. The process involves the custodian gathering all accumulated vouchers and receipts for the period.

These documents are then submitted to the accounting department, which issues a check for the exact amount of the disbursements. This check restores the petty cash fund to its original, established balance. Before replenishment, the custodian performs a reconciliation, verifying that the sum of cash on hand and the total value of all vouchers and receipts matches the initial fund amount.

Any discrepancies identified during this reconciliation process must be investigated promptly. Regular reconciliation helps in catching errors, preventing fraud, and ensuring the petty cash fund aligns with recorded transactions.

Internal Controls for Petty Cash

Implementing internal controls protects the petty cash fund from misuse and ensures accountability. A fundamental control is the separation of duties, meaning the petty cash custodian should not also be the person who authorizes expenses or performs the independent reconciliation of the fund. This separation minimizes the risk of fraud.

Businesses should establish clear expense limits for individual petty cash transactions, often ranging from $25 to $50 per expense, to prevent large sums from being handled outside standard procurement processes. Regular, unannounced cash counts and periodic reviews of petty cash transactions by someone other than the custodian are also important to identify discrepancies early.

The petty cash fund itself must be stored in a secure location, such as a locked drawer or safe, with access limited to authorized individuals. Finally, clear, written policies and procedures regarding petty cash usage, including documentation requirements and approved expense categories, provide a framework for consistent and compliant management.