The risks of petty cash
The custodian would then hand in the receipts to the accounting team for proper record-keeping. Next, a person is chosen to manage the petty cash, called the petty cash custodian. This person makes sure the money is being spent correctly, hands out the cash when needed, and keeps track of all transactions. It’s their job to make sure the fund is used properly and refilled when it runs low.
Petty cash explained: How it works and how to manage it
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Understanding how to manage and record petty cash transactions is vital to avoid accounting headaches. This entry records the expense under ‘office supplies’ and reduces the petty cash account accordingly. Always make sure a receipt is collected and attached to the petty cash log for documentation. When a petty cash fund is in use, petty cash transactions are still recorded on financial statements.
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- This money is typically kept in a secure location within the office, such as a locked drawer or cash register, and the business will use a system to keep track of deposits and withdrawals.
- Although there can be minor variances, when unbalanced, the source of the discrepancy should be identified and corrected.
- Preventing the risk of overusing petty cash for unauthorized expenses requires clear usage guidelines and consistent monitoring to maintain financial control.
- These minor costs can add up, and having a plan to cover them without derailing your budget is a key part of financial wellness.
- When replenishing the petty cash fund, the cashier ensures accurate balances of receipts in the petty cash book.
Balancing petty cash what is petty cash and why is it bad for your business involves reconciling the physical cash on hand with the recorded transactions in the petty cash log. Any discrepancies are investigated and corrected, and the fund is replenished to its original amount. This ensures that the petty cash account accurately reflects the available funds.
At its core, petty cash refers to a small, readily available fund of actual cash money used to cover minor, incidental expenses. It’s a system designed for operational efficiency, ensuring that day operations aren’t hindered by the need for formal payment processes for every small expenditure. This gives business owners much more control over their transactions and provides electronic records that can be broken out by cardholder, time of transaction and more. Any time paper is included in a business process, time, effort and the probability of error increase.
Step 2: Selecting a petty cash custodian
Yes, petty cash is considered a cash equivalent because it’s readily available and can be easily converted into cash. Understanding the advantages and disadvantages of petty cash is essential for making informed decisions. Shaping a workforce that fully embraces your company mission starts with captivating the talent you’ve worked so hard to recruit.
- Petty cash is a small amount of money that businesses keep on hand for quick, everyday expenses.
- Keeping good records makes sure the money is being used for legitimate business needs.
- Using a petty cash log or petty cash slips will help capture these expenses so they can be used to offset income for business tax purposes.
Corporate credit cards
Business owners should, at the very least, have an electronic record of their business transactions. Business credit cards can provide that feature, adding transparency into their expenses. Petty cash, being a liquid asset, is prone to misappropriation by your employees without adequate controls. Some of your workers could use the cash for purchases — such as lunch or other personal needs — that do not benefit your business. Designate someone other than the petty cash custodian to maintain records of transactions and disbursements. Limit the use of the petty cash to purchases where checks cannot be used.
Petty cash is different from cash on hand, which refers to a company’s cash and liquid assets in the cash register and the business’s bank accounts. It’s the practice of accurately recording, monitoring, and reconciling petty cash transactions to maintain clean, audit-ready books. Without proper structure, small expenses can easily slip through the cracks—leading to discrepancies, poor tracking, or even misuse, and it can damage your cash flow. Unfortunately, businesses cannot set expenditure limits on petty cash, which puts employees at risk of overspending. Without a set budget, employees can easily spend too much simply because they do not have a clear picture of how much they can spend, or what is left in their budget.
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From the perspective of a small business owner, the importance of accurately recording petty cash transactions cannot be overstated. Each receipt must be meticulously logged to ensure that all expenditures are accounted for and can be justified during an audit. For instance, if a business uses petty cash to purchase office supplies, this expense can typically be deducted as a business expense.
When replenishing the petty cash fund, the cashier ensures accurate balances of receipts in the petty cash book. Subsequently, they forward these records to the bookkeeper or accounting team, who supplement the fund with additional cash from the bank. The cashier then updates the petty cash book to reflect the revised balance.
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You’d use it to cover small, day-to-day costs involved in running a business, without extra delays or paperwork. But unless you have a clear system, it can get tricky to keep track of where the expenses are coming from. Without proper controls, the business’s petty cash account becomes vulnerable to theft by employees, and it’s hard for you to know who took the cash.