Managing a business’ day to day expenses often involves the use of some physical money, but what is petty cash? Read about the petty cash meaning and more in this guide.
Even though these amounts may sometimes seem trivial, tracking them ensures a smooth running of any business.
HMRC requires that a business’ electronic account should contain expenses for petty cash to avoid penalties, with fines ranging between £5-15 for each day of non-compliance.
Petty cash is the small sum of money available to take care of business-specific incidental expenses.
It is typically used for minor purchases that are too small to justify formal procurement processes.
These funds are used for items such as office supplies, postage, or reimbursements for miscellaneous employee expenses.
Petty cash is usually available to anyone in the organisation for an approved purpose, although access is often restricted to a custodian.
Petty cash meaning and importance
Businesses usually have between £50-£500 set as the petty cash. A petty cash tin or lock box is usually designated, where only approved personnel have access to it.
Therefore, the money is stored in such a way that it is available to be used and protected from misuse.
Petty cash is a small amount relative to a company’s total finances, but it is still considered important.
Essentially, it makes it possible to get hold of cash for minor and urgent costs, ensuring businesses can circumvent delays in getting hold of essential items.
This system ensures no long delays in terms of approvals for low value transactions and enables operations to continue as usual.
Petty cash also reduces reliance on personal employee funds to purchase items related to business.
These systems would facilitate employees, as they don’t tend to prefer spending their own money with the need to to ask for a reimbursement later down the line.
Common uses of petty cash
Petty cash is primarily intended for unplanned or immediate expenses. Here are some typical examples of its use:
- Office supplies: Items such as printer paper, pens, and envelopes are often purchased using petty cash.
- Employee reimbursements: Minor costs incurred by employees, such as a bus fare or parking fee during a meeting, can be reimbursed through petty cash.
- Miscellaneous purchases: Expenses for items like birthday cakes, cards, or flowers for a colleague’s farewell are commonly funded this way.
- Postage and delivery fees: Small amounts needed to send documents or packages are another common application.
Take a look at our accounting tips for cash-in-hand businesses too.
Effective management of petty cash is essential to prevent misuse and ensure all transactions are accounted for.
Managing petty cash
Businesses should implement clear procedures to oversee the use of these funds.
1. Appointing a custodian
Assigning responsibility to a custodian helps maintain control over petty cash. This individual authorises withdrawals, monitors balances, and ensures funds are replenished as needed.
2. Establishing a petty cash policy
A formal policy provides guidance on how petty cash is to be used. This should specify:
- Eligible expenses.
- Procedures for requesting funds.
- Limits on spending.
Such a policy ensures uniformity and prevents unauthorised or inappropriate use of petty cash.
3. Tracking transactions
Records must be kept. Every transaction should be documented with details including:
- Date of purchase.
- Purpose of expenditure.
- Amount withdrawn.
- Name of the requester.
- Supporting receipts.
You may also find this guide helpful – creating a statement of financial position.
Record-keeping methods
Keeping a record of petty cash transactions is a must have part of effective management. Documentation that is up to date and is transparent will make any reconciliation process much easier.
Petty cash vouchers
These are forms completed when funds are taken. The voucher will include transaction date, amount spent, description of purchase, and current supporting receipts. Vouchers should have numbers for ease of use and tracking.
Petty cash book
The system of recording transactions in a petty cash book is systematic. This is an overview of the fund’s balance and it is a very useful tool for doing accounts reconciliations. Entries in the book should include details of:
- Deposits made to replenish the fund
- Withdrawals for specific purposes
Petty cash reconciliation means comparing the amount recorded with what is found in the tin. It makes sure there are no discrepancies or unaccounted expenses.
Businesses should practise reconciliations periodically, for instance it could be the end of each month or when the fund is replenished.
During reconciliation, the missing or erroneous funds need to be investigated promptly.
This process not only ensures they will continue to be accurate in their keeping of records, but it also deters the misuse of the system.
For further reading, take a look at our guide on cash basis versus accrual accounting.
Safeguarding Petty Cash
Since petty cash involves physical money, businesses must take measures to safeguard it:
- Limit access: Only authorised personnel, such as the custodian, should have access to the funds.
- Secure storage: Store petty cash in a locked tin or cabinet, with the key kept in a secure location.
- Monitor usage: Implement periodic checks to ensure compliance with the petty cash policy.
These precautions help prevent theft or unauthorised spending.
Benefits of using petty cash
Petty cash simplifies the process of handling small expenditures. It ensures that minor expenses do not disrupt regular operations or financial workflows.
By providing immediate access to funds, it reduces the time and effort needed for reimbursements or approvals.
Furthermore, a well-managed petty cash system reflects positively on a company’s financial discipline.
It demonstrates an organised approach to managing even the smallest transactions.
Challenges and limitations
However, there are problems with petty cash. It is susceptible to misuse or being stolen without proper controls.
Discrepancy can arise if there is poor record keeping, leading to difficulty in the reconciliation process.
Petty cash also can also cause inefficiencies in the payroll cycle which relies heavily on petty cash for repeated transactions.
Where petty cash isn’t feasible, it’s important to pursue another approach—such as corporate credit cards or expense management software—so as to benefit the business.
Keeping petty cash records
However, it is also essential to keep records of petty cash transactions:
- This guarantees that financial statements reflect the true cash position of the business.
- A lack of proper record keeping will cause errors in reporting and can create compliance problems.
- Expenses like petty cash should be reflected in the balance sheet and profit and loss statement.
- If things are regularly reconciled, businesses can maintain a clear view of where their finances are.
It’s convenient to have petty cash, but way more secure and tracking friendly to have prepaid cards or digital wallets. Additionally, these solutions are also integrated well with accounting software, and as such, no manual record keeping is necessitated.
Conclusion – petty cash
Petty cash management is simple and necessary for low level expenditure. It gives a simple way to handle small, unplanned purchases, from office supplies to employee reimbursements.
We also recommend reading our guide on annual accounts, including how to prepare them.
Good management together with strong policies and proper record keeping makes petty cash an integral part of the business but ensures it is not a liability.
Whether you’re streamlining petty cash or running larger financial tasks, having the right processes in place will make a real difference.
If you are a business owner and are looking for formal advice on how to manage your finances, Accountants East London will give you the right advice.
If you have any queries about petty cash or would like to enquire about our services, please do not hesitate to contact us.
