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What is petty cash?

Petty cash or a petty cash fund is a small amount of cash set aside by a business for daily or weekly expenses that require payment in cash terms, or are too small in amount to be issued a check. It is a pre-determined amount of cash that is kept on hand to be used for small cash expenses or emergency purchases.

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The amount of petty cash kept by a business is determined based on the daily or weekly cash expenses made which could be anywhere between RM50 to RM1,000, or more. Petty cash is usually stored in a small cash box or cash drawer at a location that is only made known to one or two appointed custodians of the petty cash fund. As a precautionary and security measure, the petty cash location is not made known to everyone in the office. Control of access limits theft incidents.   

Examples of petty cash payment

There are many forms of petty cash payments a business will be required to make such as disbursing an employee for purchase of refreshments to be served during an office meeting, cash payment to the plumber for fixing the toilet, purchase of one or two stationery items with a combined amount of RM3.20, and maybe even the occasional lunch treat for office staff.   

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How to set up petty cash account?

Setting up a petty cash account is easy, however, it is advised for petty cash policies and payment procedures to be established before a petty cash account system begins. Among the areas to be addressed are:

1. What is the ideal petty cash amount that should be provided?

  • A business should determine this amount based on the average cash expense that is used within a set timeframe.

2. What is the balance amount that will trigger a request for replenishment?

  • This amount is usually determined by the minimum petty cash amount that should be on hand at any one time.

3. Who are the petty cash cashier and custodian?

  • The petty cash cashier is usually someone from Finance, and the custodian could be a department head.
  • The cashier will provide the first petty cash fund via a check, and thereafter ensures petty cash payments are legitimate and reconciled before replenishments are given.
  • The custodian will dispense petty cash from the fund received by the cashier, ensure payments are only made for legitimate business expenses, ensure there is no shortage and excess of petty cash balance, kees track of petty cash level and request for replenishment.

4. Where will the petty cash be kept?

Location of petty cash must only be known by the custodian to prevent theft, especially when petty cash amount is big. Petty cash should also be stored in a cash box or safe.

5. How will the petty cash transactions be recorded?

This is usually done via transaction logs or petty cash vouchers, and expenses are charged to the business’ general ledger account. Detailed information of the payments are required such as the date, payment description, amount paid, person dispensing the cash, and person receiving the cash. Transaction receipts must always be attached.   

Source: Business Accounting Basics

How does petty cash account work?

Whenever a petty cash payment is made, the transaction is recorded into a petty cash log or petty cash vouchers. The receipts for each petty cash payment must also be attached in the petty cash log or with the petty cash vouchers.

When the petty cash balance falls below the minimum level, the petty cash custodian will request for a petty cash replenishment from the petty cash cashier. During this time, the petty cash log and all receipts will be provided to the petty cash cashier for a reconciliation.

After receipts of petty cash payment and petty cash balance are tallied with the initial petty cash amount, all petty cash expenses will be charged to the business’ general ledger expense accounts, and a check is issued to the petty cash custodian for ‘petty cash’.

In the event that the petty cash payment receipts and petty cash balance do not tally with the initial petty cash amount, the petty cash cashier will need to do the necessary accounting to record a shortage or an excess. Should the petty cash balance be lesser than what it should be, a shortage has occurred (gain for the business); and should the petty cash balance be more than what it should be, there is an excess (loss for the business).   

Why petty cash is important to small businesses?

Petty cash allows cash to be kept on hand to be used as change for customers of a small business. It also allows speedy cash payment in a short time.

Petty cash payments are usually very small amounts that does not necessitate a check payment to be issued. Petty cash payments are also payments that are usually required to be made in cash such as the purchasing of pisang goreng from a nearby food stall.

Petty cash also allows you the flexibility of making quick payments for emergency services that require prepayment. With petty cash in hand, a certain amount of payment can be made without having to go through a long payment processing time and affect vendor service delivery.