Small businesses typically hold some amount of petty cash as a convenience for making minor purchases, particularly when reimbursing employees. But even a solo entrepreneur is likely to withdraw some cash from the business bank account to pay nominal expenditures, such as coffee with a client.
One of the problems with petty cash is properly accounting for its uses. This is accomplished by a simple system for tracking cash disbursements and replenishing the money. Withdrawals from petty cash should be replaced with receipts equaling the amount of funds spent.
Periodically, the receipts are collected and a bookkeeping exercise is conducted to reduce petty cash and increase the expenses paid. The sum of remaining cash and the expenses should equal the original amount of petty cash. If there’s more money than expected, funds must have been transferred from the business bank account or the enterprise is an operation with some customers paying cash.
Businesses that hand petty cash to employees must make the workers accountable for how the money is spent. While an employee has the money, a note should be placed with petty cash stating who has the funds along with the amount and date advanced. The employee should return later with receipts and the unspent cash. This procedure permits the business to record the expenses as if it had paid them directly. Similarly, an employee may turn in a receipt and obtain a reimbursement from petty cash. That method also allows the business to deduct the expense paid by the employee. Since the cash outflow is recorded as a business expense, the amounts are not being paid as wages, and therefore the employees don’t incur personal compensation.