Petty Cash 101: How to Avoid Accounting Errors

Many companies hold petty cash as a convenient means for making small purchases. The money is also used to reimburse employees for office items they buy. Unfortunately, petty cash is prone to accounting errors.
One of the problems is failure to accurately record expenses paid with petty cash. The money is an asset just like a bank account. Businesses should therefore subject petty cash to the same controls as funds in a bank. A policy is needed that establishes who approves petty cash disbursements as well as who reconciles the cash drawer.
Money removed from petty cash is replaced with receipts for a business expense attached to a supervisory approval for the purchase. The custodian of petty cash periodically totals the receipts and determines the amount of petty cash spent for each business expense category. The sum of the receipts and the remaining cash always equals the same original petty cash amount. After the petty cash fund is nearly depleted, the custodian turns in the receipts and obtains replacement cash. This returns the petty cash amount to its original balance.
Businesses must conduct reimbursements to employees under the rules of an accountable plan. Doing so means that reimbursements are not considered income for employees and are therefore exempt from payroll taxes. Businesses with accountable plans treat reimbursements as if they had paid the expenses directly. Accountable plans require reasonable accounting of expenses with a business purpose. Disbursements in advance require the employee to return with a receipt for the business purchase and the change.

Many companies hold petty cash as a convenient means for making small purchases. The money is also used to reimburse employees for office items they buy. Unfortunately, petty cash is prone to accounting errors.
One of the problems is failure to accurately record expenses paid with petty cash. The money is an asset just like a bank account. Businesses should therefore subject petty cash to the same controls as funds in a bank. A policy is needed that establishes who approves petty cash disbursements as well as who reconciles the cash drawer.
Money removed from petty cash is replaced with receipts for a business expense attached to a supervisory approval for the purchase. The custodian of petty cash periodically totals the receipts and determines the amount of petty cash spent for each business expense category. The sum of the receipts and the remaining cash always equals the same original petty cash amount. After the petty cash fund is nearly depleted, the custodian turns in the receipts and obtains replacement cash. This returns the petty cash amount to its original balance.
Businesses must conduct reimbursements to employees under the rules of an accountable plan. Doing so means that reimbursements are not considered income for employees and are therefore exempt from payroll taxes. Businesses with accountable plans treat reimbursements as if they had paid the expenses directly. Accountable plans require reasonable accounting of expenses with a business purpose. Disbursements in advance require the employee to return with a receipt for the business purchase and the change.