What Is a Petty Cash Fund and How Does It Work?
Learn how to effectively establish, operate, and control a petty cash fund for efficient management of minor business expenses.
A petty cash fund manages minor, day-to-day business expenses that are impractical to pay with checks or credit cards. It provides quick payments for small operational needs, streamlining transactions.
Understanding Petty Cash
A petty cash fund is a designated pool of cash used to cover small, immediate business expenses. Businesses opt for petty cash due to its convenience, avoiding potential bank fees associated with numerous small transactions, and providing immediate access to funds.
Common examples of expenses paid from a petty cash fund include small office supplies, postage, office refreshments, or minor reimbursements for local travel or tips. The specific amount varies by business size and need. This cash is usually kept in a secure location, such as a locked drawer or box, accessible only to authorized personnel.
Establishing the Fund
Establishing a petty cash fund involves steps for proper management. The initial amount of the fund is determined based on the anticipated volume and nature of small, recurring expenses the business expects to incur. Companies typically aim for an amount that can cover a reasonable period, such as a month’s worth of minor expenditures.
A petty cash custodian is designated to oversee the fund. This individual is charged with managing the cash, enforcing rules, and documenting transactions. To obtain the initial cash, a check is typically written to “Petty Cash” or directly to the custodian, and then cashed. This initial funding is recorded in the accounting records by debiting a specific “Petty Cash” account and crediting the main cash account, formally establishing the fund within the company’s financial system.
Operating and Replenishing the Fund
Once established, the petty cash fund is used for eligible transactions, with the custodian responsible for each disbursement. When cash is paid out, a petty cash voucher or log entry is completed, detailing the expense. It is essential to collect a receipt for every purchase made from the fund, which is then attached to the corresponding voucher or log entry. This diligent record-keeping helps maintain transparency and accountability for all expenditures.
As the cash in the fund diminishes, it needs to be replenished to its original balance. The custodian gathers all receipts and the transaction log, then submits them to the accounting department. Accounting reviews these documents, verifying that the total of the receipts plus the remaining cash on hand equals the original fund amount. A check is then issued for the total amount of the disbursed funds, which the custodian cashes and adds back into the petty cash box, restoring the fund to its initial balance. This replenishment process ensures that the fund remains at a fixed level, known as an imprest system, simplifying reconciliation.
Ensuring Accountability
Maintaining the integrity of a petty cash fund requires internal controls to prevent misuse and accuracy. A fundamental control involves requiring a receipt for every disbursement, providing documentary evidence. These receipts, along with a detailed transaction log, form the basis for tracking how the funds are utilized.
Regular reconciliation of the fund is another important practice, ideally performed by someone other than the custodian. This independent review verifies that the sum of cash on hand and the total value of receipts consistently matches the original fund amount. Periodic, unannounced audits further strengthen controls by deterring unauthorized activities. The principle of segregation of duties is particularly relevant, ensuring that the person who disburses cash is not solely responsible for its reconciliation or the approval of its replenishment, which helps safeguard against errors or fraud. These measures collectively contribute to accurate financial records and the prevention of financial irregularities.