In order to keep track of all expenses related to your home-based or small business, it is necessary to keep track of the minor day-to-day expenses you pay in cash, as well as the expenses you pay by check or bank transfer. Minor cash expenses add up over time, and it will be important to know what they are in order to record them on your books, control them, and also to be able to deduct these expenses for income tax purposes. Rather than paying these expenses out of your personal funds, it may be more convenient to have a petty cash fund.
Types of Petty Cash Expenses
The use of debit and credit cards may be rapidly replacing and eliminating cash transactions, but there are still several types of minor expenses that are more convenient to pay by cash, or which you may prefer to pay by cash. These could include postage, office supplies, minor repairs, tips, gas for your vehicle, parking and tolls, and public transportation fares, among others.
Advantages of Using a Petty Cash Fund
The advantages of using a petty cash fund for business-related expenses include the following:
You can separate business expenses from personal expenses.
A petty cash procedure provides an easy way to record minor cash expenses on your business books.
You will have the receipts in order to take tax deductions for these minor expenses.
The petty cash procedure will allow you to keep documentation of these expenses together in one place.
By knowing where your cash is being spent, you will be in a better position to control it.
Petty Cash Fund Procedure
Setting Up a Petty Cash Fund
A petty cash fund is a certain amount of money, in cash, that is set aside specifically to pay for minor business expenses. In a home-based business, you would operate the petty cash fund yourself. In a small business with more than one person, the petty cash fund would be assigned to a single person who is responsible for holding the fund, handing out cash as necessary, and keeping records of disbursements. The amount of the petty cash fund will depend on the nature of the business - how many cash disbursements are made, for how much, and how often. The idea is to have sufficient cash in the petty cash fund to cover minor expenses over a certain period of time, for example a month.
The petty cash fund is initially set up by drawing a check to cash or made out to the person who will be responsible for the fund, called the custodian, for the pre-defined amount. This check is recorded on the general ledger in a separate account called Petty Cash. This check is then cashed by the fund custodian and the cash is kept in a small cash box, locked desk drawer, or other safe place.
Using the Petty Cash Fund
The procedures for handling a petty cash fund are quite simple and generally work as follows:
Each time cash is needed to run an errand, make a purchase, or pay some minor expense, the petty cash fund custodian hands out the amount of cash requested, and places a voucher in the cash box stating the name of the person, date and amount. The voucher can be a simple slip of paper, and if you as the business owner are operating the petty cash fund yourself, the voucher would basically be a reminder for you.
When the person who requested the petty cash returns, he or she gives the petty cash custodian the receipt and the difference between the amount of cash requested and the actual amount spent, per the receipt, is settled with the person. The change is returned to the petty cash fund if the actual expense was less than the amount requested, or cash is taken out of the petty cash fund to reimburse the person for the difference, if the actual expense was more than the amount requested. Here again, if you are the owner and are handling the fund, you would do this yourself.
At any given time, the total of cash, receipts and vouchers pending receipts in the cash box should equal the total petty cash fund amount.
Replenishing the Petty Cash Fund
The original amount of the petty cash fund remained fixed. As cash is disbursed, it is periodically replenished to return the amount of petty cash fund to the original fund balance.
When the petty cash fund custodian sees that the cash balance is getting low, he or she prepares a petty cash replenishment request, attaching the receipts from the cash box and indicating the general ledger account the expenses should be charged to. A standard format could be set up for this petty cash replenishment report.
A check is then made out to the custodian for the amount required to replenish the petty cash fund, and the expenses are recorded.
The custodian (or you as the owner) cashes the check, puts the cash back in the safe or cash box, and the petty cash fund returns to its original amount.