What is Petty Cash and How Should You Record It

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There are many business owners who look to actively avoid getting involved with the company’s accounts and therefore tend to not take into account small factors like petty cash. Well, it might seem as a minor component of the balance sheet you prepare at the end of the financial year, but that does mean that it is insignificant.

But, the fact remains that although it plays an almost negligible role in the balance sheet it has a significant overall impact on the finances of your business. For this, it is important for you to know what petty cash is and how it works.

What is petty cash?

As the name suggests petty cash refers to small amounts of cash that are used in a business. There are two prominent reasons to maintain petty cash and they are-

  • To make small day-to-day payments in cash for food, refreshments, parking, etc
  • To make change for patients or customers

A specific amount is kept as petty cash and used for certain purposes. Every now and then when the account goes below a specific amount the system is refilled.

Basic steps to maintain petty cash account and recording-

#1- Prepare rules and regulations

A simple and clear process makes your task easier and for that you need to set certain ground rules. Make it a point that all your employees are aware about these rules and regulations.

Too many cooks spoil the broth- similarly if everyone has an access to petty cash you are likely to lose track of how much amount was utilised for what purpose and by whom. Therefore, it is wise to give this responsibility to an individual so that they have a clear idea about its status.

Inform employees that they should preserve the receipt of any petty cash purchase they have made. The petty cash should be reconciled every month which means that all transactions are balanced on a monthly basis and you do not have to stress yourself at the end of the financial year.

#2- Petty cash log book

You can use a book or simply maintain an excel sheet (and save paper) to maintain cash flow in the petty cash. This log must include all details about deposits and withdrawals during the month.

A detailed description of date, time, what was purchased, account to be charged, person who received the funds and the one who approved the transaction. Every month a new log should be prepared so that your records are organised and free of any clutter.

#3- Transform recorded petty cash into journal entries

As mentioned previously, maintain monthly records as this will simplify your work and you have to put minimum efforts towards it. Set a fixed date for every month on which you can record all your petty cash transactions. Recording transactions on a daily basis would be the best choice because you are less likely to miss out on any transactions that occurred in a day.

There are some software’s which can help you to maintain these records and quicken your task completion rate.

#4- Reconcile your petty cash

Reconciling petty cash is simply the process of ensuring that you have receipts of all the cash purchases made through petty cash. Irrespective of whether you are shedding £5 from petty cash make it a point to have/ give a receipt of it.

This will save you from unnecessary cross-calculations and wasting time in finding out where you spent that money.

There are certain businesses which provide business cards to their employees instead of employing a separate petty cash system. This is a contemporary option wherein you do not have to keep manual records.

When your employees swipe their cards all the details automatically gets registered in your main system and you just have to make calculations at the end of the month. Companies prefer to have a specific limit so that it is convenient to trace back payment history and maintain a score.But, if you run a small business adopting a manual process would be wiser because you do not have to invest huge amount of capital in technical systems. Instead, you can invest your resources to search for cash flow finance services that can guide you in a steady cash flow cycle.

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