The petty cash system

A petty cash system is a set of policies, procedures, controls, and forms that a company uses to dispense cash for various miscellaneous needs, such as office supplies and services. The basic process of setting up a petty cash system is:

  1. Location. Decide upon the locations where petty cash funds will be installed. There may be a single one for the entire company, or perhaps one per building or department.
  2. Funding. Decide upon the size of the petty cash fund at each location. This is typically in the range of $100 to $500. Given the high risk of petty cash theft, it is generally better not to create excessively large petty cash funds, even though smaller ones must be replenished more frequently.
  3. Custodian. Appoint petty cash custodians. These are usually administrative staff who are on-site most of the day, and who have sufficient clerical skills to maintain the necessary amount of record keeping with a high degree of accuracy.
  4. Boxes. Set up locked petty cash boxes or locked desk drawers, including a supply of petty cash vouchers. It may be necessary to create an alarm that will sound if a box or drawer is improperly accessed.
  5. Vouchers. Purchase a set of petty cash vouchers from an office supply store. There is no need to create a custom form.
  6. Fund petty cash boxes. Shift the designated amount of cash to each petty cash box, and record the transfer in the general ledger as a movement of cash to a separate petty cash account.
  7. Training. Train the petty cash custodians in how to evaluate requests for petty cash, how to fill out vouchers in exchange for cash payments, and when to request replacement cash when cash levels are low.
  8. Reconciliation. Enact a procedure whereby an accounting person periodically examines the amount of cash and receipts in each petty cash box to see if the total matches the original amount of funding established for the box, and to reconcile any variances.
  9. Replenishment and recordation. Enact a procedure whereby the cashier replenishes the amount of cash in each petty cash box, as requested by the petty cash custodians. This also involves summarizing and recording all expenditures in the general ledger.

The petty cash system must incorporate a sufficient number of controls to mitigate the risks that petty cash will be stolen, or that it will be granted for improper reimbursement requests, or that petty cash expenditures are improperly recorded. You should periodically review the control problems that have arisen, to see if the system of controls should be adjusted to reduce the risk of loss.

The petty cash system has been replaced in many companies by procurement cards, which are credit cards controlled by the business. Procurement cards have the singular advantage of removing readily-accessible cash from the company premises. Another alternative is to have employees purchase items with their own funds and then reimburse the employees with expense reports. If the latter option is used, encourage employees to submit expense reports frequently, so that they are not funding company expenditures for long. This also means that submitted expense reports should be processed as quickly as possible.

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