In years past, the petty cash box or drawer was very important for businesses. Two decades ago, some companies would keep as much as $5,000 in their petty cash stashes to pay for small or immediate need-purchases. However, with the advent and subsequent increase in usage of business and vendor credit cards and charge cards, the need for petty cash accounts dropped significantly. In recent years the need has plummeted even more due to the rise in the use of online payment options such as Paypal. Despite this, some companies still maintain petty cash accounts for incidentals, including pizza for the staff or flowers for the receptionist.
Usage and Management
Companies often spend more time and effort on tracking their petty cash cachets than on tracking their company credit card transactions! Perhaps this has to do with having actual cash on the premises and the fact that you won’t receive a call from the bank regarding fraudulent activity in your petty cash account! Petty cash accounts lend themselves well to control and tracking mechanisms. Business must define and track the usage (drawing down) and replenishment of the petty cash account using customs/systems and procedures that work best for that firm.
What Is Petty Cash?
No, it’s not the cash that’s so minor, it’s not worth worrying about! Officially, petty cash is the cash that businesses keep on site to meet incidental and other small expenses or pay for very minor purchases. Most companies secure the funds in a locked drawer, such as a desk or file drawer, of keep it locked in a small safe or file cabinet. What if you receive a package C.O.D.? You would use petty cash to pay for it!
General Ledger Balance
One internal control feature that exists within petty cash is the recordation and maintenance of the general ledger balance. When a company creates a petty cash fund, it creates the fund and records the amount put into the fund in the general ledger. One company may use $50.00; another may create the fund with $250. The amount varies according to a company’s needs. Once established, companies rarely change their petty cash general ledger balance. Instead, businesses spend down the cash and replenish, over and over. To ensure that a company’s actual petty cash account equals its general ledger balance, the company must always maintain the petty cash amount in actual cash or the equivalent in receipts.
Restricted Access and Sign-outs
Companies restrict access to petty cash accounts to prevent theft. Therefore, they
typically identify one or two people whom they make responsible for tracking and oversight of the petty cash fund. In addition, most firms keep a sign-out book with the cash for easy recordation. Each person who withdraws funds from the account must record the date, amount and her name. She must submit a receipt as soon as she obtains one. Typically, the responsible party will initial next to the fund withdrawal once she receives the receipt.
Another internal control feature of petty cash is the use of checks to replenish the fund amount. For example, a company has a $200 petty cash fund and spends down $150. The petty cash overseer must obtain a check for $150 to replenish the fund. Usually she must submit receipts equaling $150 to accounting to obtain a check for that amount made out to cash. Once she cashes the check, she deposits the cash back into the petty cash drawer. This system of replenishment acts as an excellent internal control.
When companies set up a petty cash fund, they usually put the cash in a location that only a select few can access. For example, firms often place the cash in a large envelope or cash drawer then insert the container inside a locked file drawer or safe. The amount a company puts into its petty cash fund depends on the firm’s needs. Some may place $100 while others may place $300. As part of the set up, companies assign responsibility to one or two people and refer to this person as the cash custodian. Typically this person works in the finance or accounting department. Companies may also establish specific rules for the fund’s use and notify applicable employees.
Companies regularly replenish the cash in the petty cash fund when the amount gets low or drops to or below a predetermined amount. Typically, at that time the cash custodian requests a check in the amount of the cash that has been expended. The custodian cashes the check and puts that cash back into the cash drawer. A company usually keeps the amount in the petty cash fund stable to avoid altering the dollar value reported in its general ledger account.
Companies must monitor the amount of cash that goes into and out of its petty cash fund to prevent theft and fraud. An easy way to do this is to require all employees withdrawing money to sign out funds and provide their name, date, and the funds’ purpose. Employees must then obtain and submit receipts as soon they can. Employees should return any unused cash to ensure that the cash taken exactly equals the amount shown on the receipt. Companies can then periodically audit these transactions by confirming that receipts exist for the cash removed.
- Accounting Coach: What Is Petty Cash?
- Penn State Educational Office Professionals: Annual Audit Form http://www.psu.edu/org/PSEOP/forms/AnnualAuditForm.pdf
- Accounting Coach: What Does It Mean to Replenish the Petty Cash Fund? http://blog.accountingcoach.com/replenish-petty-cash/
- Utah Valley University: Cash Receipts Checklist