Definition
Petty cash refers to a small amount of discretionary funds which are kept on hand and used for paying small, miscellaneous business expenses. These expenses may include minor office supplies, reimbursements, or courier fees. The fund is typically kept in a secure place like a cash box or drawer.
Key Takeaways
- Petty Cash is a small amount of cash that a company keeps on its premises to pay for minor, everyday business expenses. This can include office supplies or reimbursing an employee for a company expense paid out of pocket.
- The amount of Petty Cash kept on hand varies by business and its needs. However, it’s always a small, fixed amount. Once this cash starts to run low, the Petty Cash custodian has to refill it.
- Petty Cash also aids in maintaining financial control as every transaction made from the fund should be recorded and supported with receipts. This is necessary to maintain accuracy and accountability. Periodic audits of the Petty Cash fund can ensure successful company protocol.
Importance
Petty cash is a critical finance term and concept as it plays an integral role in the day-to-day financial operations of many businesses.
This small amount of readily available cash is allocated for minor expenses, which might seem insignificant individually, but as a whole, they contribute considerably to the business’s overall operating costs.
Businesses use petty cash for expenses such as office supplies, postage dues, or employee reimbursements which are too small to merit writing a check.
Proper management of petty cash ensures transparency, accountability, and efficient tracking of these minor expenditures, contributing to financial order and accuracy.
By maintaining a petty cash system, businesses can prevent disruption of operations due to lack of cash on hand and can simplify the accounting process.
Explanation
Petty cash serves the important purpose of covering small, unexpected expenses that inevitably arise in the running of any business. Rather than writing checks or using a credit card for small amounts, petty cash offers a convenient alternative, helping to streamline financial operations.
This easily accessible fund usually covers small-scale expenditures such as office supplies, minor repairs, small tips, or even surprise celebrations. Providing employees with access to small amounts of cash for these minor eventualities can also reduce time-consuming expense reporting and reimbursement procedures.
Furthermore, the use of petty cash often aids in the proper track and control of expenses, because it operates under the so-called “imprest system”. Under this system, the petty cash fund has a fixed amount, and when it starts to run low, it is replenished to the predetermined level with a check. The check’s amount is exactly what was spent since the last replenishment, ensuring the fund maintains the same level of cash on hand at all times.
Consequently, this method helps in ensuring accountability, smooth operation, and financial integrity in any given business.
Examples of Petty Cash
Office Supplies: A small business may keep a petty cash fund to purchase minor office supplies, for instance, buying staplers, notepads, pens or printer paper. These are smaller expenses that do not necessarily require going through the entire purchase order process.
Employee Reimbursements: In some workplaces, if an employee makes a business-related purchase out of their own pocket, they can be reimbursed utilizing petty cash. This could range from taxi fare to a local client’s meeting, to purchasing a lunch for a spontaneous meeting with potential clients.
Store Change: Retail businesses often keep a petty cash drawer to make change for customers. If a customer pays in cash and requires change, the cashier would use the petty cash to provide it. This can also apply to restaurants, food stalls, and any type of business dealing with a physical point of sales system.
Frequently Asked Questions: Petty Cash
What is petty cash?
Petty cash is a small amount of cash that a company keeps on hand to cover minor expenses. It might be used to pay for small, unexpected out of pocket expenses that employees incur, such as a taxi fare or office supplies.
How do we manage petty cash?
Petty cash is usually managed by a petty cash custodian. Any employee who needs petty cash must provide a valid business reason and bring a receipt for their purchase. The custodian is then responsible for replenishing the fund once the tally of transactions equals the original amount in the fund.
What are the typical uses for petty cash?
Petty cash is typically used for office or business expenses that are too small to warrant a formal check payment process. This could include small amounts for office supplies, food for meetings or small transportation expenses.
What is a petty cash voucher?
A petty cash voucher is a standard form used as proof of a petty cash payment. It usually includes details such as the date, expense type, vendor, amount, and relevant signatures.
What are the potential risks of using petty cash?
The main risk of using petty cash is the potential for theft, misuse or loss of cash without a record. In order to mitigate these risks, companies typically create strict rules regarding the use and tracking of petty cash.
Related Entrepreneurship Terms
- Imprest System
- Cash Voucher
- Petty Cash Reconciliation
- Cash Float
- Reimbursement
Sources for More Information
- Investopedia: Reputed online source of financial information.
- AccountingCoach: This site offers comprehensive accounting lessons including on topics like petty cash.
- Corporate Finance Institute: A recognized authority on finance and accounting concepts.
- CNN Business: Regularly covers a range of business and finance topics.
