Petty Cash Management - Introduction to Petty Cash
Petty Cash Management Introduction
Definition Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by check or transfer, because of the inconvenience and costs of the effort to make the check or transfer (http://en.wikipedia.org/wiki/Petty_cash)
Suggested Practices Create Guidelines: create simple guidelines about what petty cash should be used for (i.e., what types and amounts of expenses) and train staff about the guidelines. Appoint a Custodian: appoint a Petty Cash Custodian who is responsible for managing the petty cash. Train that person well about the concept and guidelines of petty cash and ask them for ongoing ideas and suggestions as they learn on the job in order to continuously improve the process.
Suggested Practices (Continued) Require Documentation: require that receipts be provided by employees after they make their purchase. If a receipt is unavailable then use a pre- printed Petty Cash Voucher. Secure the Cash: keep the cash in a locked cashbox in a locked desk drawer for safety. Reconcile Monthly: reconcile the petty cash every month; be sure to add corresponding entries in the accounting ledger/system.
The Petty Cash Process Setup, Daily Transactions, and Reconciliations
Step 1: Establish Business Rules & Guidelines The business rules and guidelines should be simple, clear, and based on the needs of the organization. Here are some suggestions: ◦ Establish a Beginning Amount: don’t put too much cash into the account because it won’t be in a totally safe place and the amounts that are taken from it should be relatively small; you don’t want employees to think that they can use the account for things that should be paid as part of the normal accounts payable process (i.e., approved by a manager or the business owner and handled by the proper accounting staff). Maybe start with USD 300 (THB 10,000) and adjust for your business needs and adjust over time as necessary.
Step 1: (Continued) ◦ Establish a Maximum Transaction Amount: establish a maximum amount that can be paid from the account. USD 20 (THB 500) should be enough for the typical petty cash transaction. If more is needed then instruct the staff that a manager or the business owner must approve the transaction. ◦ Require Receipts: receipts or a Petty Cash Voucher should be required. These are used to reconcile the account and without them it will be impossible to do. They are also used to satisfy government and accounting regulations by proving the expense was actually incurred.
Step 2: Do the Initial Setup Establish the Petty Cash Custodian: recruit someone who is trusted and respected by management and staff alike. The person should be responsible and capable of explaining the rules to staff if necessary and to refer them to management in cases where the amount requested is beyond the established maximum transaction amount. Obtain Secure Containers: buy a cashbox and a lock for it. The Petty Cash Custodian should have one key and a manager and the business owner should each have one key. Keep the locked cashbox in a locked desk or file cabinet drawer; get one if you don’t have one. Although the cashbox is locked, if it is left out in the open it will be easy for someone to walk off with it and break the box open with a tool. If it’s kept in a locked drawer it won’t be obvious to non-employees where it is and it will be more secure (the desk/cabinet is big and heavy and it has a lock).
Step 2: (Continued) Create The Account: write a check, or get cash from an ATM, in the amount that was established as the starting amount (the canceled check or the ATM receipt will serve as the proving document so be sure to get the ATM receipt if using that method) and put it in the cashbox. Get a variety of note denominations and some coins as well to make it easy for the custodian to give amounts that are close to what is needed. Prepare Staff: train staff members about what types and amounts of transactions the petty cash fund is for, the requirement that a receipt or Petty Cash Voucher is needed upon purchase, and who the custodian is. Maintain consistency about the rules in order to simplify the process for everyone. Get a System: obtain or create a tool that can be used to facilitate your petty cash management system.
Step 3: Create a Transaction Log The transaction log contains the daily transactions for each period (i.e., month). In its simplest form, the transaction log is created each month in a tabular format (i.e., rows and columns; on an Excel worksheet, for example) where the rows are the daily transactions and the columns contain the specific pieces of information about each transaction such as dates, amounts, and descriptions. More advanced transaction logs contain more information that can help facilitate easy month-end reconciliations and the creation of journal entries. Transaction logs should enforce the business rules (i.e., guidelines and practices) that you have set up for your organization.
Step 4: Record the Daily Transactions Transactions are contained in monthly transaction logs. Sections of Transactions: there are two sections of a petty cash transaction: (1) cash out; (2) actual expense. ◦ Cash Out: cash out refers to the cash taken out of the cashbox. ◦ Expenses: the details of the expense that was incurred. Recording Transactions: record both sections of each transaction in order to maintain consistency and keep track of the cash going out of and into the cashbox.
Step 5: Perform the Monthly Reconciliation The very convenience of petty cash also presents its most significant audit challenge; because the cash box is usually not well-secured, reliably tracking access to the money presents an internal control risk. Ensuring that the cash is used correctly requires a reconciliation of receipts, a review of the cash storage location, and a review of the procedures employees use to access the funds. An audit should be performed regularly (http://smallbusiness.chron.com/audit-petty-cash-17444.html). Reconcile the petty cash on a monthly basis in order to maintain control over the cash and to record the transactions in the accounting ledger/system. Reconcile more frequently if you would like to maintain tighter control over the cash in the cashbox.
Petty Cash Management Guides Introductions ◦ Introduction to Petty Cash ◦ Introduction to the Petty Cash Management Module Deep Dives ◦ Module Navigation ◦ How to Record Transactions ◦ How to Manage Logs and Transactions ◦ How to Perform a Reconciliation ◦ The Guide to Viewing and Understanding Reports Library Home
Summary Petty cash is small in amount but big in complexity. There are six steps in a petty cash system: 1. Create the guidelines that will clarify how your organization will handle its petty cash. 2. Do the initial setup that includes appointing a custodian, obtaining a cashbox, and training staff. 3. Create a transaction log. 4. Record the daily transactions. 5. Perform the monthly reconciliation. 6. Replenish the cash in the cashbox. Repeat steps 3-6 every month, adjust your guidelines as your organization changes and matures, and keep staff informed and trained.