Keeping a small amount of cash in your office or at the store makes it much easier for office managers, bookkeepers, and supervisors to cover small, occasional expenses. But although petty cash is a relatively small amount of money, it can be easily stolen or abused if you don’t handle it right.
Do: Designate a Reasonable Dollar Amount
Establish a starting dollar balance for the petty cash fund. This should be small enough that employees won’t be tempted to steal it, but large enough that you don’t have to replenish it too often. Pick a dollar amount you think will cover small office expenses for a month or so. The Accounting Coach states that a petty cash fund between $50 and $200 is sufficient for many small businesses.
Do: Specify What it Can Be Spent On
In his article for the Institute of Internal Auditors, bank auditor Umair Danka notes that there’s a significant risk of petty cash being spent on non-business activities. To combat this, make sure your employees understand upfront what petty cash can and can’t be spent on. Petty cash is often used to make change for customers and pay for small, erratic expenses that pop up. Put your petty cash policy in writing, and offer some examples of appropriate expenses. For example, petty cash may be used to purchase additional postage, paper towels, coffee, or other basic office supplies. You can also mandate that petty cash transactions be under a certain dollar amount, like $25.
Do: Require Employees to Account for Expenses
Petty cash isn’t usually a significant expense for your business. However, failing to hold employees accountable for petty cash may encourage theft or inappropriate use of company resources.
Require that employees maintain a running log of every petty cash transaction, along with receipts. Each transaction should include the date, the amount, and what was purchased with the petty cash. Review this log before you replenish the petty cash fund.
Don’t: Give All Employees Petty Cash Access
If every employee has access to petty cash, bad — or nonexistent — record keeping usually results. Instead, designate one employee to be responsible for the petty cash fund. That person will determine if an expense is appropriate, hand out the cash to employees who need it, and ensure the expense log is kept up to date.
Don’t: Leave the Cash Unsupervised
Petty cash is a highly liquid asset, which means that it’s easily stolen. Even if you trust your employees, cash left out on a table or desk could be stolen by an office visitor or a customer. To combat this risk, keep the petty cash in a locked filing cabinet or desk drawer. You and the employee designated to oversee the fund should have the only keys.
Don’t: Leave Petty Cash Off Your Books
Petty cash is a small amount of money, but it adds up quickly as it’s replenished. To track the cash, create a petty cash account in the asset section of your chart of accounts. When you’re ready to replenish the fund, record the expenses in your accounting software based on the petty cash expense log. Then, record the replenishment by debiting the petty cash account and crediting the bank account you used to refill the fund.