What is Petty Cash?

Looking for help to understand this financial business concept? Worry no more, in this guide we will cover what Petty Cash is, who can use it, how to register it and other solutions you can use for your business expenses.

What is Petty Cash?

Most businesses have a small amount of cash readily available to make certain purchases, this is commonly known as petty cash. The person using petty cash does not have to initiate a purchase order for which multiple approvals are required. Since the amount involved is usually small, petty cash can be used immediately by employees who are previously authorised.

Some businesses may appoint a person to approve petty cash usage and oversee the funds available. The amount of money used as petty cash would depend on the size of the business, but it is a very small proportion to the actual cash that a company has. Petty cash can be in the form of cash or other instruments like debit cards.

What can you use Petty Cash for?

Since the amount held as petty cash is small, petty cash cannot fund any high-value transaction. The use of petty cash can depend on the size and nature of the company, but in general, a small business can use petty cash for some of the below examples:

• Buying office stationery;
• Transportation of employees provided that the bill is not too high. Generally, airfare and higher travel-related expenses are not covered under petty cash;
• Postage and courier expenses within a certain amount.

The above examples typically cover the petty cash expenses for a small organisation. The cap for these expenses may be around GBP 20. For larger companies, GBP 20 may not be appropriate depending on the scale of business and the number of employees. In those cases, the petty cash balance could be a few hundred or even thousands of pounds. In the case of larger firms, the scope of expenditure could be expanded to cover the following expenses:

• Expenses related to clients, including meal-related spending;
• Urgent maintenance activities;
• Purchase of office equipment.

When petty cash is in the form of a debit card or prepaid card, approval is normally done after the expense occurs. Validity of use of petty cash can only be done post transaction in this case.

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Who authorises the use of Petty Cash?

A Finance Manager is generally responsible for approving any payments made using petty cash. The authorization is based on the nature of the expense. The employee requesting petty cash should also provide the necessary documents backing up the expense. Most often, the manager of employees also has oversight of the costs claimed.

Who is allowed to use Petty Cash?

Since the amount of expenses claimed is capped to a small amount, most employees are generally allowed to use petty cash. In larger corporations, the manager provides the first level of approval before funds are available. These organisations can also have a restriction on which positions or employees can use this payment option. In smaller companies, where the hierarchy is flatter, such distinctions may be absent.

Cash on hand vs. Petty Cash

There is a significant differences between what constitutes cash on hand and what comes under the scope of petty cash. The following table differentiates between the two terms.

Cash on hand	Petty Cash
This includes all the cash that the company has access to. This could include any bank deposits or other liquid assets that can be converted into cash with ease.	This forms a part of cash on hand. Petty cash can be accessed quickly, since it is available in cash instead of other liquid assets that may not be readily available.
This forms a significant part of the total assets a company has.	This is a very small portion of the total assets of the firm. In fact, it is generally a small fraction of the cash on hand overall.
This can be used for high-value transactions like meeting current obligations that include paying interest or buying supplies from contractors.	Petty cash can be only used for small value transactions.
It forms a part of the balance sheet in the form of cash or marketable securities.	It is not reported separately in any of the financial statements.
Using cash on hand can be cumbersome and could require several approvals depending on the value of the transaction.	This is more easily accessible since approval goes through only the Finance Manager, if any approvals are needed at all.

How to record Petty Cash?

For small businesses, petty cash expenses and receipts are recorded in the petty cash book.¹ This is generally a manual process, and the receipts for these entries are also kept in physical form.

For larger companies, the entire process for applying and approval can be automated for better record keeping. The receipts are also maintained in the online form so ease of access and better reconciliation.

While making a purchase, the following entries are recorded in a petty cash book:

• a. Purchase Item;
• b. Date;
• c. Amount.

There could be an additional field with the name of the officer approving the purchase. The cash balance is recorded after each disbursement. Once the balance falls below a certain amount, the petty cash account needs to be funded back to an appropriate level. The reconciliation can be done monthly to ensure that the receipts collected tally with the expenses recorded in the book.

What are the common issues with Petty Cash?

There are several issues that can crop up while setting up a petty cash account. Some of the common issues include:

• When the record-keeping is manual, there can be processing errors while maintaining petty cash records;
• The amount involved is small, and so the level of supervision is likely not very high. This can give rise to fraudulent activities whereby employees can inflate expenses. In certain cases, the account can be used for personal use if the Finance Manager approving the request is not vigilant enough;
• The money in the form of petty cash earns little or no interest;
• Keeping track of the bills and invoices related to petty cash payments can also be a cumbersome process. The volume of these records can be high and pose a challenge if the number of transactions is large. Maintaining the receipts in physical form is also difficult as these documents are subject to wear and tear.

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Are there better ways to manage Petty Cash?

As financial transactions have become digital, many options are now available to manage petty cash. Most businesses now use different online platforms to make petty cash available to employees. Business debit cards are now made available to employees for their use.

The company can keep a limit on the value of transactions so that the expenses are capped. A business debit card ensures that the money is held in an account where the money continues to earn interest. The transactions made using a business debit card must continue to be monitored along with the supporting documents. Any inconsistencies observed are highlighted by the monitoring officer.

Likewise, a prepaid card is an option provided by businesses to employees. Unlike a debit card, the prepaid card is not linked to any account and must be funded by the company. While it functions similar to a debit card, the amount in a prepaid card does not earn interest.

Go Cashless with a Wise employee expense card

Managing petty cash with cards creates less of a hassle for the company. However, it can be challenging for a business involved in multiple countries or operating across multiple offices.

In such cases, opting for a multi-currency account offered by Wise Business can eliminate the complexity of having multiple cards for different locations. With Wise Business expense cards you can improve petty cash management by providing a better oversight since the transactions are easily trackable on the app. The card offers real-time conversion in multiple currencies without the hefty fees.

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Source:

1. Accounting Tools Article

Source checked on 30-09-2022