Petty cash definition
/What is Petty Cash?
Petty cash is a small amount of cash that is used to make incidental cash purchases and reimbursements, such as for delivered meals. Petty cash can mitigate the effects of the more cumbersome accounts payable process, which involves the issuance of a check. The essential petty cash process is to authorize the payment of a certain amount of cash (such as $300 in bills and coins) into a petty cash fund, which is then controlled by a petty cash custodian, such as the office manager.
Petty Cash Procedure
The petty cash custodian pays out cash as requested in exchange for some form of evidence, such as a receipt or a voucher. The aggregate total of all remaining bills, coins, and evidence of receipt in the petty cash fund should always match the authorized amount of cash for that fund. Once the amount of bills and coins in the fund runs low, the custodian takes the receipts and vouchers to the accounting department and swaps them for a replacement amount of bills and coins. This cash replacement brings the total amount of cash in the fund back up to the originally authorized amount of cash.
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Advantages of Petty Cash
Petty cash can be used to avoid the considerably more cumbersome check authorization, printing, and signing process. Instead, petty cash payments are quick and easy, where the petty cash custodian merely has to hand over a small amount of cash to complete a payment transaction.
Disadvantages of Petty Cash
There are multiple problems with having a petty cash system, which are as follows:
Lack of control and security. Petty cash is usually stored in a simple cash box without advanced security measures, making it vulnerable to theft or misuse. Without strict controls, it can be easy for employees to access funds improperly or for cash to go missing without detection.
Limited accountability and documentation. Tracking petty cash transactions often relies on handwritten receipts and manual logs, which can lead to errors, lost receipts, or incomplete records. This lack of formal documentation makes it difficult to audit petty cash expenses accurately and identify discrepancies.
Risk of misuse and fraud. Since petty cash transactions are typically small and less scrutinized, there is a risk of misuse, such as using the funds for personal expenses or inflating reimbursement amounts. Weak oversight increases the potential for petty cash fraud.
Administrative burden. Managing petty cash requires time and effort to reconcile the fund regularly, record expenses, and replenish the cash balance. For larger organizations, this manual process can become cumbersome and inefficient compared to using digital payment methods.
Incompatibility with digital systems. Petty cash transactions do not integrate easily with digital accounting systems, making it harder to maintain accurate financial records. As businesses increasingly adopt cashless and automated financial systems, the use of petty cash can complicate expense tracking and financial reporting.
Due to these disadvantages, many businesses are shifting towards prepaid cards or expense management software to handle small transactions more securely and efficiently.
Alternatives to Petty Cash
A more streamlined alternative to petty cash is the use of company credit cards to make purchases, or reimbursing employees for cash payments that they make on behalf of the company. These approaches require more paperwork than a petty cash system, but also eliminate the need to maintain petty cash on the premises.