What is Petty Cash

What is Petty Cash?

Petty cash is a small amount of discretionary funds that your business uses to make change for customers or when it doesn’t make sense to write a check. It can help you pay for small expenses. For example, you can use petty cash to pick up some printer paper or to buy food for a lunch and learn.

How much you keep in your petty cash fund depends on your business – some businesses might only need $50, while others might need a couple hundred dollars.

How Do I Prevent Petty Cash Fraud?

Unfortunately, it can be easy for your employees to take advantage of the petty cash. Maybe, they ask for $20 to pick up some office supplies, but the supplies only end up costing $15. Instead of returning the $5, your employees might be tempted to pocket it. $5 can add up after a while.

To protect your petty cash fund, try to give access to as few people as possible. You can give access to two people:

  • one person is responsible for replenishing the fund, and
  • one person is responsible for recording the transactions.

Make sure you only replenish the fund when you don’t have enough cash on hand to make it through the day.

It’s also a good idea to set a dollar limit on purchases that can be made with petty cash.

How Do I Keep Petty Cash Records?

When you first start the petty cash fund, you’ll write a check. Then, record it in your general ledger by debiting the petty cash fund and crediting the cash account.

When someone uses the fund, debit each expense and credit cash in a separate cash disbursement journal. At the end of the period or when you reconcile the petty cash fund, record the amounts in your general ledger.

Do I Need Petty Cash Slips?

At the end of every accounting period or anytime you reconcile the account, verify the transactions through petty cash slips. A petty cash slip is a small form to document a disbursement from the fund. The slip should include

  • the date,
  • amount,
  • name of the person receiving the funds,
  • reason for the disbursement,
  • the general ledger account to be charged, and
  • the initials of the person disbursing the funds.

If there’s a receipt to justify the expense, it should be attached to the slip.

Besides being able to account for any money taken from the petty cash fund, having slips to document each transaction will also allow you to deduct some of those expenses from your business’s income.