Why Petty Cash Is Important to Small Businesses

why do businesses use petty cash funds

Petty cash is usually operated on an “imprest” system where an employee is tasked with maintaining and keeping track of petty cash. A petty cash fund is a small amount of company cash, often kept on hand (e.g., in a locked drawer or box), to pay for minor or incidental expenses, such as office supplies or employee reimbursements. The most important part of a petty cash system is the documentation of each transaction.

why do businesses use petty cash funds

Petty cash helps streamline small expense transactions, reducing administrative burdens and processing time while maintaining financial control and accountability. Periodically, the petty cash fund is replenished through a formal process, and any expenses incurred are recorded in the organization’s accounting system for proper documentation and tracking. It is typically maintained in a physical cash drawer or box with a fixed, predetermined amount of money, and a designated custodian is responsible for managing and disbursing these funds.

Maintain Regular Reconciliation Schedules

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  • If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are recording revenue.
  • Whenever someone in the company requests petty cash, the petty cash custodian prepares a voucher that identifies the date, amount, recipient, and reason for the cash disbursement.
  • The overseer updates the petty cash with cash earlier the week to ensure that the delivery fees can be paid.
  • Start by deciding how much money you will need each day, both to make change for customers and to make small cash payments.
  • It is a wise fiscal practice to periodically review your petty cash utilization.
  • The English word “petty” derives from the French petit, which means “small” or “little.” Likewise, “petty” means minor or insignificant.

The purpose of a petty cash fund is to provide business units with sufficient cash to cover minor expenditures. The intent is to simplify the reimbursement of staff members and visitors for small expenses that generally do not Exceed $25.00, such as taxi fares, postage, office supplies, etc. These are some commonly asked questions because the concept of petty cash funds sounds outdated.

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The inherent objective of a petty cash fund is to finance the emergencies or incidental expenses of a company or department. Therefore, it’s good for companies to create and maintain petty cash funds. Tracking and maintenance of petty cash are required like any other financial account. But the benefit of using the petty cash fund is that less oversight is required than other options like credit cards or corporate cards.

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Holding these currencies allows the company to pay local expenses, such as salaries, rent, and utilities, without incurring exchange rate fees and risks. It also enables efficient and timely payments to suppliers, reducing the need for frequent currency conversions. Before you start a petty cash fund, you’ll need to decide how much you want the fund to be.

Funding For Small Expenditures In Office

When there is a shortage of cash, we record the shortage as a “debit” and this has the same effect as an expense. If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are recording revenue. If there were cash overage, the petty cash account would be debited and the cash over and short account would be credited. In this case, the expense balance decreases, and the year-end balance is the net balance from all overages and shortages during the year. Occasionally, errors may occur that affect the balance of the petty cash account. This may be the result of an employee not getting a receipt or getting back incorrect change from the store where the purchase was made.

  • But the benefit of using the petty cash fund is that less oversight is required than other options like credit cards or corporate cards.
  • These are physical cards you can issue to employees and they can then use for business-related expenses.
  • A company would estimate their weekly or monthly cash requirement and according to that, they will establish a limit that will be withdrawn from the bank account.
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  • Despite making the expense out of pocket and waiting for the reimbursement of the amount, a petty cash fund can be used in such instances.
  • The journal entry for giving the custodian more cash is a debit to the petty cash fund and a credit to cash.

But it’s true that many businesses still manage petty cash funds, petty cash drawers, and sometimes petty cash registers. When an employee requests reimbursement, the custodian should enter that into a log of petty cash transactions. Some companies also use paper vouchers, which are filled out by the employee requesting the cash and kept in the box with the cash. petty cash Petty cash vouchers should include the name of the employee, the date, and amount of cash disbursed and should be signed by the employee. Petty cash, as the name implies, is for small expenditures that are most conveniently made using cash. This fund allows employees to be easily and quickly reimbursed for expenditures they make on behalf of the business.

Record disbursements

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  • Include these items in the policy, and consider how you can reduce the risk of employee or customer theft.
  • Unlike recurring bill payments, petty cash usually covers infrequent expenditures such as taxi rides, coffee, office supplies, gifts for clients, or lunch for employees.
  • The designated custodian and the business owner, CFO, or controller should be the only ones who have the key.
  • Or, you may burn through your petty cash so quickly and often that it requires setting a higher replenishment point to ensure you do not run out at a vital point in the future.
  • Holding these currencies allows the company to pay local expenses, such as salaries, rent, and utilities, without incurring exchange rate fees and risks.

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