What Is Petty Cash Management?

Petty cash is a relatively small amount of cash on hand available for employees of a business to make small, non-recurring purchases easily and quickly.

Petty cash is a current asset and should be listed as a debit on the balance sheet. When first funding a petty cash account, the accountant should write a check made out to "Petty Cash" for the desired amount of petty cash and then cash the check at the company's bank. The journal entry on the balance sheet would show a debit to the business bank account and a credit to the petty cash account. When petty cash is used for a business expense, the appropriate expense account, for example office supplies or employee reimbursement, should be expensed.

While non-cash transactions are increasingly becoming the norm for most transactions, cash is still needed to cover small, “one-off” purchases.

Your business will need to have a petty cash fund for these or similar small expenses, and you will need to have a process in place—petty cash management—to properly account for those purchases.

Not surprisingly, petty cash funds are vulnerable to misuse and could even lead to outright fraud.

A petty cash management system helps companies ensure that the funds are used appropriately and the transactions are properly documented. Having such a system in place serves as an internal control to protect the business against theft and fraud, and it supports the larger, general ledger reconciliation process.

Petty cash offers a business convenience for small transactions when a check or a corporate credit card is unreasonable, unacceptable, or unavailable. The amount of petty cash (bills and coins) will vary by company, usually $100-500. Examples of transactions a petty cash fund could be used for include:

• Office supplies

• Cards, flowers, or other small gifts

• Paying for a small meal, coffee, or treats for employees

• Reimbursing an employee for small work-related expenses

• Courier or other last-minute shipping fees

The process for managing your petty cash fund is commonly referred to as the “imprest system.” This a form of financial accounting and the basic characteristic is that a fixed amount is reserved and is replenished after money is spent. This replenishment will come from another account.

Setting up a petty cash management sysem will include a number of essential elements, such as a designated custodian for managing the account, a source of funding, policies and procedures for managing the expenses, and accounting procedures for expense reconciliation.

The first step in the imprest system is to appoint a petty cash custodian. The custodian will be the primary person in the organization responsible for managing the petty cash.  Designating a custodian establishes accountability and reduces the incidence of error or fraud by minimizing the number of employees who have access to the cash in the fund.

Also under the imprest system, a balance is predetermined for the petty cash fund. Cash is allocated to the fund in that amount from the company’s checking account, and the balance is maintained as purchases occur.

The petty cash balance should be sufficient to support the amount of activity expected in the account, and will typically be a reflection of the size of the company. Small businesses are just as likely to have a petty cash fund as a large corporation, but the total amount in the fund will vary.

Once the cash has been released to the petty cash fund, you will want to secure it, most likely in a lock box, safe, or a locked drawer or file cabinet. Only the custodian and other specifically designated individuals, such as the CFO, may possess the key. This helps ensure accountability and protects against theft or fraud.

Your company will also want to have a set of policies in place to establish how the petty cash funds are spent and administered. These policies will identify the sort of transactions that qualify as petty cash expenses, and it will establish guidelines for how these business expenses are to be documented.

For proper administration and accounting of the petty cash account, the custodian should maintain a log of all disbursements. The log will allow for proper reconciliation of the account at the end of the reporting period when financial statements are prepared.

In addition to a log, your company’s policies should include a requirement for receipts to be provided for every purchase. These will provide detailed vendor or cash register receipts, which itemize the item or service purchased, the date, and the amount.

Petty cash vouchers should also be required to further document the transaction by providing additional information, like the purpose of the expense, the account, and the individual who is responsible for making the purchase.

With active spending, the amount of petty cash will eventually diminish, and the funds should be replenished to support more purchases. At this point, the custodian will request a new check from the company’s bank account in an amount that will return the fund to the original balance.

Receipts and spending should be reconciled before the funds are replenished.

All of the above should be closely monitored. Regular tallies of the funds, verification of receipts and vouchers, and reconciliation of expenditures will ensure compliance with company policies and minimize discrepancies in the balance sheet.

This is typically done by someone other than the custodian for proper segregation of duties.

By creating, maintaining, and enforcing your petty cash management system, you’ll be establishing a solid set of internal controls that will help ensure that all transactions are recorded and that purchase amounts reconcile with the sum remaining in the fund. It’s important to remember that, even though the amounts coming and going from a petty cash fund maybe be small individually, over time they can add up. Companies, whether large or small, don’t want to lose deductions on their financial statements or lack visibility into where and how resources are spent.

Safeguarding the petty cash, segregating duties, and reconciling monthly are all critical internal controls for petty cash management.

Petty cash funds can be misused. Having cash in a lock box creates a unique set of challenges, which demands an effective cash management system.

With petty cash on hand, there is an increased tendency to spend the money freely without attention to detail. This lack of attention can lead to a missing or inadequate paper trail, and sometimes fraud or theft.

Expenses should also be fully documented and policies followed to ensure that the expenses are in line with the company’s objectives.

While assigning a custodian to manage a petty cash fund increases accountability, it also has risks. The custodian should be a competent, trustworthy employee in the organization.

The records of petty cash disbursements should also be kept by someone other than the custodian or anyone else who has access to the fund, for proper segregation of duties and to avoid misappropriation of the cash.

While it is important to have a thorough process in place for documenting the transactions in the petty cash fund, a traditional paper-based approach has many limitations.

Simply put, petty cash expenses lack the immediate record generated by a credit card purchase, for example. Improper or overlooked log entries can lead to errors, and supporting documents like receipts and invoices can be misplaced or overlooked.

There are many ways an organization can enhance the management of its petty cash fund to address some of the pitfalls and challenges of a traditional, paper-based approach. One way is to invest in petty cash management software.

The first step an organization can take to improve its petty cash management system is to migrate to a computer based, software approach. Petty cash management software can help your company reduce the incidence of error and misuse by automating the workflow process around petty cash management and providing a centralized repository for storing all the associated documentation.

Software puts controls in place to ensure that petty cash reconciliations are being properly performed. These include:

• Automating the petty cash reconciliation workflow

• Ensuring that reconciliations are properly reviewed and approved

• Maintaining appropriate segregation of duties

Software also provides standardized templates to ensure that petty cash funds are managed consistently across the organization. A centralized repository of all your documentation allows for an easy audit of these records by internal auditors.

When a case of fraudulent use of funds is identified, the software automates the workflow process to enact additional internal controls. Such controls are necessary to prevent any further fraud from occurring.

BlackLine Account Reconciliations manages and reconciles all petty cash accounts via a centralized system. Our automated reconciliation software delivers templates for recording account data with customizable checklists ensure standardized petty cash records across the organization.

Integrated storage allows all records to be easily linked directly to the transaction details. This also makes it easy for internal auditors to review petty cash records.

With this solution, petty cash reconciliations follow an automated workflow that ensures proper review and approval of account data, and maintains appropriate segregation of duties. When discrepancies are identified in petty cash funds, the product automates the workflow for their review by accountants.

When correcting journal entries are required to address discrepancies in petty cash funds, BlackLine Journal Entry integrates to automate this process. In addition to handling correcting journal entries, the solution controls and automates the workflow for posting all journal entries associated with petty cash accounts.

Controlling this process is necessary due to the high-risk associated with funds in these accounts.  BlackLine Journal Entry ensures that journal entries are properly documented and follow required review and approval processes, eliminating their potential as a source of fraudulent activity.

When fraudulent activity is identified, BlackLine Task Management automates workflow tasks to ensure proper internal controls are enacted to prevent any future fraud from occurring.

Read this guide to learn about the process automation options that are available to you, and how to use them to improve your finance and accounting operations.