Running a business equals having to deal with a variety of expenses on an everyday basis. These expenses can both be minor or major depending on the nature of the expense, minor expenses can consist of things like expenses incurred for refreshment purposes, for recreational activities, or other basic expenses like the purchase of A4 size papers, pens, paper cups, tissues, etc. Major expenses on the other hand require proper formal approval from the managers/accounts team as they are quite expensive and should only be purchased if necessary.

In business terms, the funds assigned to manage these minor expenses are called petty cash and while these expenses are very economical and don’t put a dent in the cash flow while making the purchase, if not tracked properly even these basic expenses can pile up and turn out to be a financial nightmare for any business. So a business needs a petty cash book to track and manage these expenses efficiently.

What is a Petty Cash Book?

A petty cash book definition is essentially a ledger or record-keeping book that tracks the petty cash inflows and outflows. By definition, a petty cash fund is a fixed amount of cash designated for covering minor business expenses. These typically include office supplies, postage, meeting snacks, or transportation costs. Maintaining a petty cash book allows you to record these transactions systematically, ensuring transparency and accountability. 

The petty cash book records the following:

• The opening balance of petty cash
• Details of each expense, including date, amount, and purpose
• Any replenishment of the petty cash fund
• The closing balance of petty cash

What is a Petty Cash Expenses List?

Petty cash is a small amount of cash set aside to cover minor, day-to-day expenses that are too small or inconvenient to process through traditional accounting methods; one often creates a list of these expenses that typically range from a few dollars to a few hundred dollars.

Common Petty Cash Expenses:

• Office Supplies and stationeries:  
  • Pens, pencils, markers
  • Paper, envelopes, printer paper
  • Sticky notes, binders, folders
  • Staplers, hole punchers
  • Notepads
  • Business cards

• Postage and Shipping:
  • Stamps
  • Shipping labels
  • Courier fees
  • Packaging materials

• Refreshments:
  • Coffee, tea, and other beverages
  • Snacks and treats for meetings or events
  • Water bottles and condiments

• Minor Repairs and Maintenance:
  • Minor repairs to office equipment
  • Replacement of light bulbs
  • Minor plumbing or electrical fixes

• Transportation:
  • Bus and Taxi fares
  • Toll charges

• Miscellaneous Expenses:
  • Small gifts for clients or employees
  • Donations to charitable organizations
  • Fees for small services (e.g., dry cleaning, photocopying)

Though the specific usage of the petty cash fund might vary from business to business, as a general principle the petty cash is used for small and routine expenses that would be time-consuming if processed through regular accounting and finance routes.

Requirements for Petty Cash

Do not be fooled by its name, petty cash is not so insignificant. In fact petty cash is the fuel that ensures day-to-day operations run like a well oiled machine. Similarly it is imperative to effectively manage the petty cash for maintaining financial control and accountability. For that, businesses need to establish clear procedures and guidelines. 

In this section, we will outline the key requirements for managing a petty cash fund and maintaining its integrity including the appointment of a custodian, setting a fixed amount, maintaining a petty cash book, and implementing regular reconciliation.

Below are some key requirements:

• Petty Cash Custodian:
  • Assign a responsible individual to manage the petty cash fund.
  • The custodian should be trustworthy and have good organizational skills.

• Fixed Amount:
  • Determine a fixed amount for the petty cash fund based on your business needs.
  • The amount should be sufficient to cover anticipated expenses without requiring frequent replenishment.

• Petty Cash Book:
  • Maintain a detailed petty cash book to record all transactions.
  • The book should include columns for date, voucher number, description, amount paid, and remaining balance.

• Petty Cash Voucher:
  • Use petty cash vouchers to document each expense.
  • The voucher should include the date, amount, purpose, and recipient’s signature.
  • The custodian should sign the voucher to authorize the payment.

• Receipts:
  • Collect receipts for all expenses to support the voucher entries.
  • Receipts should be attached to the corresponding vouchers.

• Regular Replenishment:
  • Replenish the petty cash fund periodically to maintain the fixed amount.
  • The replenishment process should involve submitting receipts and vouchers to the accounting department for approval.

• Periodic Review:
  • Conduct regular reviews of the petty cash book to ensure accuracy and identify any discrepancies.
  • Reviews can be conducted weekly, monthly, or quarterly, depending on the business’s needs.

By following these requirements, you can effectively manage your petty cash fund and minimize the risk of loss or misuse.

How to Record and Reconcile Petty Cash?

Accurate record-keeping and regular reconciliation are crucial for maintaining the integrity of a petty cash fund. This section will provide a step-by-step guide on how to record petty cash transactions in a petty cash book. Additionally, it will explain the process of reconciling the physical cash balance with the book balance to ensure accuracy and identify any discrepancies.

Recording Petty Cash Transactions:

• Initial Entry:
  • Record the initial amount allocated to the petty cash fund as an opening balance in the petty cash book.

• Expense Entry:
  • When an expense is made, record the following information in the petty cash book:
    • Date of the expense
    • Voucher number
    • Description of the expense
    • Amount paid
    • Remaining balance in the petty cash fund

• Replenishment Entry:
  • When the petty cash fund is replenished, record the following information in the petty cash book:
    • Date of the replenishment
    • Amount received
    • New balance in the petty cash fund

Reconciling Petty Cash:

• Count the Cash:
  • Physically count the cash on hand to verify the balance.

• Review Receipts:
  • Check all receipts to ensure they match the recorded expenses.
  • Verify that the total amount of the receipts matches the total amount of expenses recorded in the petty cash book.

• Compare Balances:
  • Compare the physical cash balance with the balance recorded in the petty cash book.
  • The two balances should match.

• Adjustments:
  • If there are discrepancies between the physical cash balance and the book balance, investigate the cause of the discrepancy.
  • If necessary, make adjustments to the petty cash book to correct any errors.

• Replenishment:
  • If the cash balance is low, request a replenishment to bring the fund back to its original amount.
  • Submit the receipts and vouchers to the accounting department for approval.

By following these steps, you can ensure that your petty cash fund is properly recorded, reconciled, and maintained.

Now that we have understood the basics of petty cash, let us dig deeper into maintaining and managing the petty cash books.

What are the Different Types of Petty Cash Books?

There are two main types of petty cash books, each catering to different levels of detail and analysis needs:

• Columnar Petty Cash Book: This is the most basic format, featuring columns for essential information like date, description of the expense, voucher number (receipt reference), the amount spent, and the remaining balance. It provides a clear record of transactions but needs more in-depth expense categorization.
• Analytical Petty Cash Book: This advanced version offers a more granular view of spending. It includes additional columns dedicated to specific expense categories, such as office supplies, travel expenses, or postage. This allows for better budgeting and cost control by identifying areas of high spending.

The choice between these types depends on the size and complexity of your business. A small business with limited petty cash transactions might find the columnar format sufficient. However, larger businesses with significant petty cash activity benefit from the detailed analysis offered by the analytical petty cash book.

Format of a Petty Cash Book

Simple Petty Cash Book Format

Analytical Petty Cash Book Format

Operations of a Petty Cash Book

Setting Up a Petty Cash Fund

1. The size of the petty cash fund depends on the average monthly small expenses of the business. It should be sufficient to cover these expenses without requiring frequent replenishments.
2. Appoint a petty cash custodian to manage the petty cash fund. The person appointed  will be responsible for distributing the petty cash fund, maintaining the petty cash book, and collecting receipts
3. Define clear procedures for using petty cash, including the types of expenses that can be covered, the process for requesting cash, and the documentation required.

Recording Transactions

1. For every disbursement, the custodian issues a petty cash voucher. This voucher includes details such as the date, amount, purpose, and the recipient’s signature.
2. Each transaction is recorded in the petty cash book, ensuring that the date, particulars, voucher number, amount paid, and remaining balance are accurately noted.
3. The custodian collects receipts for all expenses and attaches them to the corresponding vouchers for reference and verification.

Replenishing the Petty Cash Fund

1. Periodically, the petty cash book is reviewed to determine the remaining balance and total expenses incurred.
2. The custodian prepares a replenishment request, attaching all vouchers and receipts. This request is submitted to the finance department for approval.
3. Upon approval, the finance department issues a check or transfers funds to restore the petty cash fund to its original amount and this transaction is recorded in the petty cash book.

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What are the Different Systems of Maintaining a Petty Cash Book

Maintaining a petty cash book can be done through various systems, each designed to ensure accuracy, control, and ease of tracking small expenses. Here are the different systems for maintaining petty cash books:

1. Imprest System

The imprest system is the most common method used for managing petty cash. In this system, a fixed amount of money, known as the imprest amount, is set aside for petty cash expenses. At the end of a specific period, the petty cash fund is replenished to its original amount, based on the expenses recorde d.

Steps in the Imprest System:

• Initial Funding: An initial fixed amount of funds is disbursed for petty cash
• Disbursements: Petty cash is used for minor expenses, and each transaction is recorded
• Replenishment: To replenish the petty cash fund to its original amount, you can submit receipts and vouchers to the finance department

2. Ordinary System

In the ordinary system, the petty cash fund is managed without a fixed imprest amount. The fund is topped up as needed, based on the custodian’s judgment and the business’s requirements.

Steps in the Ordinary System:

• Initial Funding: An amount of money is set aside for petty cash
• Disbursements: Expenses are recorded as they occur
• Replenishment: The fund is replenished whenever it runs low, without adhering to a fixed schedule

3. Analytical Petty Cash System

The analytical petty cash system involves maintaining detailed records with categorized columns for different types of expenses. This system is often used in conjunction with the imprest system for better tracking and analysis.

Steps in the Analytical Petty Cash System:

• Initial Funding: A fixed amount is allocated for petty cash
• Categorized Recording: Expenses are recorded in categorized columns (e.g., office supplies, postage, repairs)
• Replenishment: The fund is replenished regularly, and expenses are analyzed by category

Pros and Cons of Using a Petty Cash Book

Pros

1. Efficiency in Handling Minor Expenses: A petty cash book simplifies the process of managing small, everyday expenses, reducing the need for formal checks and procurement procedures.
2. Improved Cash Flow Management: By tracking petty cash transactions, businesses can gain insights into their minor expenditure patterns, aiding in better cash flow management.
3. Enhanced Accountability: The structured recording of petty cash transactions ensures transparency and accountability, reducing the risk of misuse or fraud.
4. Simplified Auditing: Maintaining a detailed petty cash book makes it easier to audit petty cash transactions, ensuring compliance with internal controls and financial regulations.

Cons

1. Risk of Misuse: Despite controls, there is always a risk of petty cash being misused for unauthorized purposes if not monitored closely.
2. Time-Consuming: Recording every small transaction and maintaining receipts can be time-consuming for the custodian.
3. Potential for Errors: Manual recording increases the likelihood of errors, such as incorrect entries or miscalculations, which can affect the accuracy of the petty cash book.
4. Limited Insight into Large Expenses: While a petty cash book is effective for tracking minor expenses, it does not provide insights into larger, more significant financial transactions.

Best Practices for Managing a Petty Cash Book

Establish Clear Policies

1. Define Allowable Expenses: Clearly outline the types of expenses that can be covered by petty cash to avoid misuse.
2. Set Spending Limits: Establish spending limits for individual transactions to ensure that only minor expenses are handled through petty cash.

Ensure Accurate Record-Keeping

1. Regularly Update the Petty Cash Book: Promptly record all transactions to maintain an accurate and up-to-date petty cash book.
2. Attach Receipts and Vouchers: Ensure that all entries in the petty cash book are supported by corresponding receipts and vouchers for verification.

Conduct Periodic Audits

1. Regular Reviews: Periodically review the petty cash book to ensure accuracy and compliance with established policies.
2. Surprise Audits: Conduct surprise audits to detect and deter any potential misuse or discrepancies in the petty cash fund.

Train the Custodian

1. Provide Training: Ensure that the custodian is adequately trained in managing petty cash, recording transactions, and maintaining the petty cash book.
2. Foster Accountability: Emphasize the importance of accountability and transparency in managing petty cash.

How can EnKash help?

EnKash offers a modern and efficient solution compared to traditional, manual petty cash book methods. Here’s how it can transform how you handle your petty cash:

Streamlined Processes

• Eliminate Manual Recording: Ditch the paper-based petty cash book. EnKash’s system automates expense recording and eliminates the risk of errors from manual entries
• UPI Transaction: Utilize digital payment systems like UPI, add users on the dashboard, and generate their UPI IDs to quickly allocate funds from parent account to employee accounts

Enhanced Control and Visibility

• Real-time Tracking: Gain instant insights into your petty cash activity with real-time dashboards and reports.
• Robust Approval Workflows: Define clear approval workflows to ensure proper authorization for petty cash requests
• Audit-ready Records: Maintain a digital record of all transactions and receipts for effortless audits and compliance

Improved Security and Reduced Risk

• Eliminate Cash Handling: Minimize the risk of theft or loss of physical cash by transitioning to a digital petty cash system
• Role-based Access Control: Define access levels for employees based on their roles (like admin view and employee view), ensuring only authorized personnel can view and  manage petty cash

Additional Benefits:

• Reduced Administrative Burden: Free up your finance team’s time from petty cash management tasks, allowing them to focus on more strategic initiatives
• Improved Employee Experience: Empower employees with a faster and more convenient way to handle small expenses, boosting satisfaction
• Scalability and Flexibility: Easily adapt the system to your growing business needs, accommodating more users and transactions

Conclusion

The petty cash book is an important tool for businesses, which helps in the easy management of minor expenses and ensures transparency and accountability in a business’s financial transactions. By understanding its types, format, operations, and associated pros and cons, organizations can implement best practices to optimize their petty cash management. While the petty cash book may handle small amounts, its role in maintaining smooth business operations and financial integrity is undeniably significant.

For businesses looking to streamline their financial processes and enhance control over expenditures, adopting a well-structured petty cash book system is a step in the right direction. By doing so, they can ensure that every penny is accounted for, contributing to a more organized and financially sound operation.

FAQs

What is a Petty Cash Book? 

A petty cash book is a record-keeping tool used to track small, day-to-day expenses. It helps businesses maintain financial control and accountability over minor expenditures.

How Often Should I Replenish the Petty Cash Fund? 

The frequency of replenishment depends on the rate of expenditure. Generally, it’s recommended to replenish the fund whenever the balance falls below a certain threshold.

What Happens if I Lose Petty Cash? 

Losing petty cash is a serious matter. You should immediately report the loss to your supervisor or accounting department. An investigation may be conducted to determine the cause of the loss and to take appropriate action.

Can I Use a Digital Tool to Manage Petty Cash? 

Yes, you can use digital tools to manage petty cash. These tools can help automate record-keeping, track expenses, and generate reports. This can streamline the process and reduce the risk of errors.

Who Should Be Responsible for Managing the Petty Cash Fund? 

A designated individual, often an accountant or office manager, should be responsible for managing the petty cash fund. This person should be trustworthy and have good organizational skills.

What are the Common Mistakes in Petty Cash Management? 

Common mistakes include inadequate documentation, lack of regular reconciliation, unauthorized use of funds, and failure to replenish the fund timely.

How Can I Prevent Fraud and Theft in Petty Cash? 

To prevent fraud and theft, implement strong controls such as regular audits, clear procedures, segregation of duties, and limiting access to the petty cash fund.

What is the Difference Between an Imprest System and an Ordinary System for Petty Cash?

• Imprest System: A fixed amount is allocated to the petty cash fund. When expenses are made, the fund is replenished to its original amount.
• Ordinary System: There is no fixed amount. The fund is replenished as needed, based on the custodian’s judgment and the business’s requirements.