Setting Up a Petty Cash Account: A Quick Fix for the Small Business Blues

Every small business has lots of small expenses for which writing a check would be impractical: Running to the store for coffee cream, for example, or getting stamps at the post office. Enter petty cash.

Petty cash is simply money kept on hand rather than deposited in the bank account. It can be kept in the cash register, an envelope, or a box for all of the occasions where you have an expense of only a few dollars. Although the petty cash fund is usually only $100 or so, it is important to keep control of the fund and to be able to account for it and reconcile it, both to make sure that all expenses have been accounted for and also to make sure that cash doesn't go missing.

Setting Up the Petty Cash Fund

Step 1: You will first have to decide where to keep it. It should either be in a cash register that is locked or in a lock box to which only one person has the key. It's critical to make only one person responsible for the petty cash fund to ensure that cash doesn't disappear.

Step 2: Once you have decided where it will be kept, you will write a check from your company bank account made payable to petty cash. Most businesses operate well with a $100 petty cash float. You can always increase it later if you find you are replenishing it frequently.

Step 3: You cash the check and put the money into the petty cash box. In your bookkeeping system, you would record the following transaction:

DR Petty Cash $100

CR Bank $100

If you are using a computerized accounting system like QuickBooks, you will simply use the check-writing function and post the transaction to petty cash.

Using Your Petty Cash

Okay, you've set up your fund. Now how does it work? Every time you need funds for a small purchase (say, $3.14 for stamps), you would physically take the money out of petty cash. In this example, you might take a ten dollar bill out of petty cash when you go to the post office. When you return, you will have a receipt (remember, always get a receipt) for $3.14 and $6.86 in change. The combination of these two things is equal to the $10 you took out of the fund.

You will put the change and the receipt back into the box and record the date, amount, and type of transaction on your petty cash control sheet, which can be as simple as a ruled piece of paper that has columns to track the necessary transaction details.

One of the important features of the petty cash control sheet is that there is room at the bottom for summarizing the categories of transactions and for segregating the tax (if you are required to do so in your tax jurisdiction). These features will make it easier for you to enter the information into your bookkeeping system.

Once the actual cash in the petty cash fund gets low, you need to reconcile and replenish the fund.

Accounting For and Reconciling the Petty Cash Fund

Before you put more money in the fund, you first need to account properly for all the cash that has come out of the fund. Start by totaling up and summarizing all the transactions on your petty cash control sheet. Your summary may look like this:

Office supplies $63.12

Postage 26.10

Miscellaneous 2.95

GST 6.12

Total $98.29

It's easy to see that if you have $98.29 in expenses, there should be $1.71 left in cash in the box.

The reconciliation happens on the bottom of the petty cash control sheet. Start with the opening petty cash, subtract the expense receipts accounted for, and compare that number to what was actually counted in the box.

Opening petty cash 100.00

Less: receipted expenses 98.29

Equals: Ending petty cash 1.71

Cash counted in box 1.71

Difference 0.00

If you end up being out of balance by more than a few cents, you will need to retrace your procedures and re-add the receipts.

Replenishing the Petty Cash Fund

At this point you need to top up the petty cash fund. You do this by writing a check for the exact amount of the total expenses; in the above example, $98.29. You cash this check and deposit the money into the box. Now you have the new $98.29 and the old $1.71, which once again totals $100.

Another way to think of the petty cash fund is that it will at any moment, between the receipts in the box and actual cash, total $100.

Now how do you record that check you just wrote? Well, you know the expenses that made up the $98.29. They are summarized on your petty cash control sheet. Our bookkeeping entry will be:

DR Office supplies 63.12

DR Postage 26.10

DR Misc. expense 2.95

DR GST paid 6.12

CR Bank 98.29

Notice that the petty cash amount on your balance sheet will never change. It will always stay at $100 unless you make it larger.

I can't stress enough the importance of following these procedures for petty cash. Accounting for low-dollar-value receipts can be annoying, but unless they are tracked and properly accounted for, they could total up to a substantial amount of expenses that you are not claiming for income tax purposes. That's like throwing money off the balcony!