Managing Petty Cash Accounts for Small Businesses

Managing Petty Cash Accounts for Small Businesses
Small business owners understand how important keeping track of spending can be — and that it’s important to be wise with smaller amounts of money too. Having easy access to small amounts of money to pay for local delivery, food, or office supplies can be a helpful way to keep your business operations running smoothly. Often, businesses refer to these small amounts of money for minor expenses as petty cash. You may have heard the term petty cash, or may be curious about petty cash accounting. We’ll provide a definition of petty cash, an explanation of petty cash management, and give an example of a case where petty cash fund accounting comes in handy. You can read on to find out what you need to know to manage your petty cash account responsibly, or click on one of the links below to jump straight to a section of your choice.

What is petty cash?

Petty cash is a small amount of money, often between $50 and $200, that companies keep on-hand for expenses that don’t require writing a check. You might use petty cash to reimburse an employee for coffee they bought for a meeting, or to purchase a new box of pens for the reception desk — we’ll cover a more detailed example in a section further down. Petty cash is important to keep tabs on because it’s easy to spend without thinking much about it. And, unfortunately, petty cash is also easily pilfered because it’s a liquid asset — it is cash after all. The best way to keep track of how much your business is spending with petty cash, and to ensure you’re not losing any to fraud, is to maintain a ledger with information about petty cash expenses. Let’s dive into the basics of petty cash management.

Managing petty cash in a small business

Managing your business’s petty cash accounting is the first step in making sure you don’t overspend or lose money due to fraud and pilfering. One way to manage your petty cash is to determine a set amount that is kept in the lockbox or register intended for small purchases. The IRS recommends a simple petty cash accounting procedure like this to keep track of small expenses:
  1. Decide on the total amount your petty cash fund should consistently have.
  2. Every time an employee spends money from the petty cash fund, they fill out a petty cash slip.
    1. These are slips, often available at office supply stores, that detail information about the payment.
    2. Information includes how the money was spent, who spent it, the amount spent, and the general company account that will be charged to reimburse the petty cash fund.
  3. Employees attach receipts to petty cash slips to verify spending.
  4. At the end of the day, count up the amount on the slips and the amount of cash remaining in the safe or register to ensure that they equal the total you designated.
Note: An important security measure that small businesses can implement is to only allow certain people access to the petty cash fund, sometimes called custodians. That way, there’s less chance that someone might make a mistake or steal, and if either does happen, you know exactly where to look. Keeping track of your business’s petty cash accounting can be a headache if you’re trying to keep a concise and manageable journal of business expenses. One option to mitigate the hassle is to only enter the amount of petty cash spent when the petty cash account custodian submits a tally of the expenses along with receipts to verify them. Then, when you reimburse the petty cash fund from your general business expense fund, you can mark that in your ledger . This will still allow you to see whether you need to cut down on petty cash spending (or if you have room for more fun stuff like coffee for the office). But, you won’t need to enter an official expense in your journal every time the administrative assistant runs out to buy more staples or a cake for an employee’s birthday. If this is sounding a little confusing, don’t worry. Here are a couple of examples that should clarify the process described above.

Petty cash accounting examples

Let’s clarify petty cash accounting procedures with a simple, every-day example. Suppose that you run a small business making boutique housewares. Your petty cash fund has a consistent $175 in the lockbox for small daily purchases.
  • Today, you have a meeting with a retailer that’s thinking of picking up your line of earthenware plates and bowls. To impress them, you have the administrative assistant Pablo run out for coffee to provide at the meeting, which comes out to $35.
  • That same day, your office copier and runs out of ink. You have your intern Jane go pick up more ink, which costs $58.
Each employee takes money out of your petty cash lockbox for their errands. The total that’s been removed from the fund is $93. Your petty cash fund now has $82 remaining. Before they leave, it’s important that you let Pablo and Jane know that they must keep their receipts after making the necessary purchases. This way, you can verify the amount they spent on the items needed for your business. Once both employees have returned from their errands, have them fill out a petty cash expense slip (as detailed in step 2 above) with the relevant information about their purchases. They will then staple the receipts from their purchases to the petty cash slips and put them in the designated place, usually in the cash box. At the end of the day, one of the petty cash custodians will gather the receipts from the day and ensure that the amount missing from the box is equal to the amount that the receipts add up to. Once this has been confirmed, they are ready to request new funds from your company’s general cash fund. Note: While there are some digital petty cash solutions on the market, many companies still choose to keep physical petty cash on hand. You never know when you’ll need it. In fact, there are some kinds of purchases where it may be preferable to use cash over a card. However, company credit cards can be useful for employees to make expenses on behalf of your small business — but these are often used in different situations than petty cash. When you’re running a small business, mistakes do occasionally happen. If there is a discrepancy in your petty cash fund accounting at the end of the day, it’s important to communicate with the fund’s custodians about where the discrepancy may have arisen. If it’s an honest mistake, it might be a good idea to discuss the need for responsible expense tracking with your employees. However, if there are consistent discrepancies, and you suspect some pilfering or fraud, this is a more serious case. The amount being stolen might not break your business’s budget, but it’s important that you maintain an honest workforce — after all, not cracking down on small pilfering could be a gateway to more serious kinds of theft later on. It may be a good idea to investigate the discrepancy and find out whether there is someone taking money from the petty cash box intentionally.

Tackling your small business’s accounting

Sitting down to manage your small business’s accounting is often an unwanted hassle after a full day of running your company’s operations. If you’re having trouble keeping up with accounting needs, Community Tax can help. Our team of skilled accountants and seasoned tax professionals are trained in every area your business may need, including:
  • Small Business Accounting: We know what small businesses need because we work with them — from petty cash to your annual budget, Community Tax can help you plan and save with our accounting for small businesses
  • Bookkeeping: We can help you maintain a diligent record of all your business’s financial transactions, so that our accountants have all the data they need to work with when analyzing your overall financial situation.
  • Tax Help: Small business taxes are a hassle, but Community Tax can help you make quick work of them. Our tax experts can help you file and see where you can save, as well as inform you about tax record retention and other crucial aspects of tax documentation. We can even help you navigate your way through an audit!
  • Feel free to give us a call today at (844) 301-3727 for a free tax consultation and to find out more about how your business can benefit from small business accounting from Community Tax.
Remember, petty cash is only a small part of the entire accounting picture for a business. While the process for managing your petty cash fund accounting may seem simple once you get the hang of it, there are plenty of other areas to diligently keep track of. Reach out to a Community Tax representative today to find out how your business can improve its finances with better accounting, bookkeeping, and tax preparation tools.