What Is a Petty Cash Fund and How Does It Work?
Discover the practicalities of a petty cash fund for managing small, everyday business expenses efficiently.
A petty cash fund provides businesses with a practical method to manage minor, day-to-day expenses that do not warrant formal payment processes like checks or credit card transactions. This fund serves as a convenient resource for incidental costs such as small office supplies, postage, or employee reimbursements for minor work-related purchases. Many small businesses utilize petty cash funds, and larger organizations often implement them within individual departments to address localized cash needs efficiently. The primary advantage of a petty cash fund is its ability to offer quick and accessible funds for immediate, small-scale expenditures.
Establishing a Petty Cash Fund
Setting up a petty cash fund begins with determining an appropriate initial amount, known as the float, which should reflect the typical volume and size of expected small expenses. This amount is generally a fixed sum, often ranging from $100 to $500, though it can vary based on the business’s specific needs. A dedicated petty cash custodian must be appointed, an individual responsible for managing and safeguarding the fund. This custodian maintains sole control over the fund, ensuring its proper use and accountability.
The initial cash for the fund is typically provided through a company check, made out to the custodian, which is then cashed. Once the cash is obtained, it should be secured in a locked box or safe, with only the custodian and perhaps a designated backup having access.
Daily Operations and Record Keeping
When a small business expense arises that is suitable for petty cash, the custodian disburses the necessary funds. For every payment made from the petty cash fund, a receipt or a petty cash voucher must be obtained. This documentation is crucial for tracking expenditures and should detail the date, amount, purpose of the expense, and the signature of the person receiving the funds. Attaching the physical receipt to the completed voucher provides robust proof of the transaction.
Maintaining a petty cash log or ledger is an important part of daily operations. This log serves as a running record of all transactions, showing the date, amount disbursed, the purpose of the expenditure, and the remaining balance in the fund after each transaction. The cash and all associated documentation, including receipts and the petty cash log, should be kept securely to prevent loss or misuse.
Reimbursing the Fund
When the petty cash fund runs low, it needs to be replenished to its original fixed amount, typically on a regular basis such as monthly, or when it reaches a predetermined minimum balance. The reimbursement process begins with reconciliation, where the custodian counts the remaining cash and sums the total of all receipts and vouchers for expenses paid. The sum of the remaining cash and the total of the documented expenses should equal the original established fund amount. Any discrepancies, such as shortages or overages, must be investigated to ensure accuracy.
After reconciliation, the custodian prepares a summary report of the expenses, attaching all the collected receipts and vouchers. This report is then submitted to the accounting department for approval and processing. The accounting department reviews the documentation and issues a check for the exact amount of the disbursements to bring the fund back to its original balance. This check is then cashed by the custodian and added to the petty cash box.