What is Petty Cash?

In finance, the term ‘petty cash’ is very common, but what exactly does it mean? 

In this article, we’ll explore the concept of petty cash, its management practices, and its importance in business operations.

Understanding Petty Cash

Petty cash is a small amount of cash set aside by a business for making small, routine expenditures that are impractical to process through the regular accounts payable system. It is typically maintained in a physical cash box or drawer in a secure location within the office. The amount of petty cash varies depending on the needs and size of the business but is generally kept to a minimal level to ensure prudent cash management.

What’s the Difference Between Petty Cash and Cash on Hand?

Petty cash is a small fund of cash kept on hand by businesses specifically to cover minor expenses such as office supplies, postage, and small incidental purchases. It is usually maintained in a designated physical cash box or drawer and is managed by a designated custodian. The amount of petty cash is typically kept at a minimal level to ensure prudent cash management and is separate from the business’s primary cash reserves.

Cash on hand refers to the total amount of cash and cash equivalents available to a business at any given time, including petty cash as well as other forms of cash such as currency, coins, and funds in bank accounts. Unlike petty cash, which is earmarked for specific small expenses, cash on hand represents the overall liquidity of the business and may be used for various purposes, including operating expenses, investments, and emergencies. 

Management of Petty Cash

Managing petty cash effectively involves several key steps to ensure accountability and transparency:

• Establishing a Petty Cash Fund

The first step in managing petty cash is determining the appropriate amount to allocate to the fund based on anticipated expenses. This amount should be periodically reviewed and adjusted as needed to reflect changing business needs.

• Designating a Custodian

A designated employee, often the office manager or accountant, is responsible for overseeing the petty cash fund. The custodian is tasked with disbursing cash, documenting expenditures, and reconciling the fund on a regular basis.

• Recording Transactions

Every disbursement from the petty cash fund should be accompanied by a receipt or voucher detailing the date, amount, purpose, and recipient of the expenditure. These records serve as documentation for tracking expenses and reconciling the fund.

• Replenishing the Fund

When the petty cash balance reaches a predetermined minimum level, the custodian must request replenishment from the appropriate authority, typically the finance department or management.

• Reconciliation

Periodically, the petty cash fund should be reconciled to ensure that the cash balance matches the recorded expenditures. Any discrepancies should be investigated and resolved promptly to maintain accuracy and integrity.

Advantages of Petty Cash

• Convenience: Petty cash provides a convenient way for employees to make small purchases without having to go through formal approval processes or paperwork. This saves time and streamlines the procurement of minor items needed for daily operations.
• Flexibility: Having a petty cash fund allows businesses to respond quickly to unexpected expenses or emergencies that arise during the course of business operations. It provides flexibility in handling small transactions on the spot, eliminating the need to wait for reimbursement or formal authorisation.
• Expense Tracking: Properly managed petty cash systems enable businesses to track and monitor small expenditures more effectively. By requiring receipts or vouchers for every disbursement, petty cash helps maintain accurate records of expenses, facilitating budgeting and financial reporting.
• Control: Petty cash funds are typically managed by a designated custodian who is responsible for overseeing disbursements and reconciling the fund. This centralised control helps prevent misuse or unauthorised withdrawals, ensuring accountability and transparency in cash management.

Disadvantages of Petty Cash

• Risk of Misuse: Petty cash systems are vulnerable to abuse or mismanagement if proper controls and procedures are not in place. Without adequate oversight, there is a risk of funds being used for unauthorised purposes or personal expenses, leading to inaccuracies in financial records and potential losses for the business.
• Security Concerns: Keeping cash on hand, even in small amounts, poses security risks such as theft or loss. Petty cash funds must be stored securely in a locked safe or cash box to prevent unauthorised access and minimise the risk of theft or mishandling.
• Administrative Burden: Maintaining a petty cash system requires ongoing administrative effort to replenish the fund, reconcile transactions, and ensure compliance with accounting standards. This can be time-consuming and resource-intensive, especially for businesses with high transaction volumes or frequent turnover of petty cash custodians.

The Bottom Line

Petty cash serves as a practical solution for businesses to manage small, routine expenses. Its establishment and management involve careful planning, designated custodianship, and meticulous record-keeping to ensure transparency and accountability.