How to Set Up and Manage a Petty Cash Account

What is petty cash?

Petty cash is a small amount of money kept on hand to cover minor and unexpected expenses that arise during the workday. The funds from the petty cash fund may be used for minor expenses such as postage, Uber fares, or reimbursing someone $10 for bringing in a box of donuts.

Why is petty cash important?

Although cash economies are declining, there is always a need to reimburse employees or to quickly pay a delivery driver. Petty cash serves these purposes. It allows for a small amount of money to be kept conveniently for various expenses.

When is it appropriate to use petty cash?

Businesses typically keep between $30 to $300 in petty cash funds. The use of petty cash is appropriate only for small, random expenses that appear suddenly. Even in these cases, the petty cash fund is suitable only if there is someone overseeing it and tracking the usage of the money.

Petty cash vs. available cash

The term “petty cash” refers to the small cash fund that a company keeps to cover emergency and unexpected expenses. The term “available cash” refers to all liquid assets a company has. This includes petty cash, but is not limited to it. Available cash refers to all the money you have in the cash register and in bank accounts, including the bills and actual coins you have in your petty cash fund.

Setting up a petty cash fund

Set up a petty cash fund by following these six steps:

1. Add a petty cash account to your chart of accounts: Start your petty cash fund by writing a check drawn on your company for “petty cash.” Cash the check.
2. Decide on a location for the petty cash fund: The location should be convenient for both the employer and employees. A logical place for the petty cash fund is the reception area where employees can go for daily tasks.
3. Select a trusted employee to oversee, track, and record petty cash expenses: The employee should be someone with reasonable access to the petty cash location. The fewer people with access, the better. You should designate two individuals to have access to the petty cash fund. If you have multiple petty cash funds across different departments, give two people access in each department. One person should be responsible for replenishing the petty cash fund. The second person should be responsible for recording petty cash transactions in your accounting system.
4. Determine an amount for petty cash: Petty cash is the initial amount of cash that you have in your petty cash fund.
5. Place the petty cash in a designated container: There may be a dedicated petty cash drawer, a secured petty cash box, or a safe. The drawer, box, or safe where you put your petty cash should have a specific location within your office that should not be moved.
6. Include a ledger page and an envelope for receipts with the petty cash: The petty cash custodian(s) should record every petty cash transaction and ensure that there is a receipt. Receipts serve as documentation for the transactions.

Tips for managing petty cash

• Replenish the petty cash fund: Perform this procedure when you cannot continue through the day with the petty cash you have on hand. Some companies keep only $30 in the fund, while others keep up to $300 or more. Choose the amount based on the expenses you need to cover each month from petty cash.
• Set a dollar limit for purchases that can be made from petty cash: This amount may be as small as $25 or $50.
• Implement

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Source: https://www.thebalancemoney.com/managing-a-small-business-petty-cash-account-393001