First, let’s discuss what it is. Petty cash is typically a small amount of cash that is held in the office for any miscellaneous purposes that may came up throughout the daily operations of our business. Typically, a supply run, or a last minute unplanned office lunch, or some other small item is purchased with this cash. Petty cash SHOULD NOT be money taken from a register (if you own a store, etc) nor should it be monies that are unaccounted for within the accounting system. What do I mean by this? You should have a petty cash “check” register in your chart of accounts and this register should reconcile (aka “match”) with the activity that has happened with the cash. This is so important to having a good accounting system in place for your petty cash.
Because it is actual cash you are using to make purchases, it is VITAL to have an accountability system in place. It is a breeding ground for theft to have cash laying around that your employees KNOW you are not reconciling. A colleague of mine had a client who was a feed store and they would send their employees into the cash register (or HEAVEN HELP ME… the safe!!) to get cash to use for petty cash purposes and would never reconcile it.
This colleague told me that the client was having large amounts of shortages in their cash count every week. It was later discovered that employees would grab an extra amount of cash and pocket it. The client was surprised because these were trusted employees. The truth is that while it doesn’t make it right, employees are statistically more likely to steal if access is easy. I have heard it called “crimes of convenience”. If your employees know you have accounted for the funds in and out of petty cash and that you will reconcile that account regularly, that alone can cut down on anyone stealing extra. A good petty cash accounting system will require receipts for each purchase made from petty cash as well as a regular (ie. Monthly) reconciliation of the account.
Keeping cash around (even in small quantities) for last-minute or emergency purposes isn’t the only option. And it certainly isn’t the least risky option. Other options would include a company credit card that would allow an employee to make purchases such as the ones you would make with petty cash and this allows for more visibility and greater accountability by the employee. Still another good option is to have an Amazon account (or whatever supplier you use often) with a company card attached to it for payment and allow employees to make purchases that way when needed.
All things considered, petty cash is an acceptable way to handle small purchases BUT it must be done with a good accounting system in place to avoid the pitfalls discussed in this post.
If you have any accounting needs, contact us here at Abacus (352) 432-8104, we are here to help you get your systems and processes in place! You are not alone in your business journey.