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Running a business

What is petty cash and how to manage it

As a practical entrepreneur, you can't expect everything to go your way. There will be days when unexpected business expenses occur. These costs can be urgent, and you may have to handle them immediately. 

That's why petty cash exists. Most enterprises handle their business expenses through petty cash funds. Read this article to discover what petty cash is, its different procedures and how to manage it.

What is petty cash?  

Petty cash is a small amount of cash a company keeps on hand to cover small expenses. It is also known as a petty cash fund. This money is used for minor or incidental expenses. Companies sometimes do this to avoid using a credit card or writing a cheque. 

Petty cash expenses usually range from $50 to $500 but can vary by country and region. Ultimately, the amount of petty cash your company owns should be determined by the needs of your business. Typical uses of petty cash funds may include the following: 

  • Small office supplies 
  • Employee reimbursements 
  • Catered lunch for clients or a small group of employees 
  • Going away parties
  • Flowers or cards for employees or clients
  • Snacks, tea and coffee for employees.
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What are petty cash procedures? 

If you're planning to create a petty cash fund, there are three basic procedures that are essential to follow. These procedures will allow you to keep your funds safe and to keep track of your funds. 

Appoint a petty cash custodian 

Small business owners will usually be the custodians for their own business. However, bigger companies will appoint a middle-level management employee to be the custodian. A custodian is responsible for: 

  • Administering petty cash rules and regulations 
  • Supervising petty cash funds
  • Requesting replenishments
  • Dispensing the funds needed 

Record all petty cash transactions 

You must create journal entries that monitor and record all petty cash transactions, just like any other transaction. These transactions should be present on your financial statements and recorded in a manner that oversees the replenishment of your funds. While the actual funding should be recorded, the individual purchases do not need to be officially recorded.

The best way to record these expenses is by collecting petty cash receipts. These receipts should match the replenishment of funds within the recorded periods. If not, these funds will be unaccounted for. 

Reconcile your petty cash 

Lastly, you must regularly review and reconcile your petty cash funds. This helps you ensure that the money spent is always repaid. Be sure to investigate and review any discrepancies as soon as they are discovered.

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How to manage petty cash 

While petty cash funds only take care of small expenses, these funds still need to be managed correctly. Keeping track of these petty cash expenses helps you to capture all your tax-deductible expenses. 

Maintain the initial amount 

The amount in your petty cash box should always remain constant. Once you begin creating the petty cash float, your petty cash account book entry will show a debit of the amount deducted to your petty cash fund. At the same time, it will show a credit of that same amount to your bank account. 

For this reason, your custodian will fill out a receipt when disbursing money to ensure that the total money will add up to the initial amount of your petty cash fund.

Exchange the receipt for a new cheque 

Sometimes, the balance in your petty cash fund becomes too low to purchase small expenses. In these cases, the custodian should tally and summarise the receipts. These receipts can be exchanged for a new cheque made to cash for the total amount equal to the receipt. Once the cheque is cashed, this amount will be added to the petty cash fund to restore the fund to its original level. 

Increase or decrease the float accordingly 

If you need to replenish the funds every few days, it probably means your fund is too small. In this case, you need to increase the float. 

But if you find that most of your petty cash is not being used, the fund amount might be too large. You should deposit the surplus petty cash into the company bank account.

Use QuickBooks for your petty cash 

If you’re looking to manage your petty cash fund well, it will take time and effort. With QuickBooks’ cloud accounting software, you’ll not only be able to access your financial information on the go, but you’ll also be able to save time and money and ensure data security.

Grow and improve your business with QuickBooks software! 

Do you feel better informed about petty cash? Access more informative articles from the QuickBooks Blog that help grow and improve small businesses. QuickBooks also provides a wide product suite from inventory management to expenses tracking, that further enhances your business' financial wellbeing.

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