How to Start a Petty Cash Fund
A petty cash fund is a small amount of cash that businesses use to cover minor expenses, such as office supplies or small office expenses. Starting a petty cash fund involves a few simple steps:
- Determine the Amount of Petty Cash Needed: The first step is to decide how much money you’ll keep in the petty cash fund. This will largely depend on the nature and volume of small expenses your business typically incurs.
- Choose a Custodian: The custodian is the person who will be responsible for managing the petty cash fund. This person will be in charge of disbursing cash, collecting receipts, and keeping track of all transactions.
- Create a Secure Storage Space: The petty cash fund should be kept in a secure place, like a locked drawer or cash box. Only the custodian should have access to this storage space.
- Withdraw Cash from the Bank: Once you’ve determined the amount needed and have a secure place to store it, withdraw the cash from the bank. This cash will be used to start the fund.
- Record the Withdrawal: The withdrawal should be recorded in your accounting system. Usually, this is done by debiting (increasing) the Petty Cash account and crediting (decreasing) the Cash account.
- Set Up a System for Tracking Expenditures: Implement a system for keeping track of all petty cash transactions. Typically, this involves keeping a log of each disbursement, including the date, amount, purpose of the expense, and the name of the person receiving the cash. Always obtain a receipt for each disbursement.
- Reconcile and Replenish the Fund: Periodically (for example, monthly), the petty cash fund should be reconciled. This involves verifying that the remaining cash plus the total of all disbursements equals the original amount of the fund. The fund can then be replenished by withdrawing cash from the bank and recording this withdrawal in your accounting system.
Remember, the petty cash system works best when it’s used properly. It’s important to ensure that petty cash is used only for minor business expenses and that all disbursements are properly documented.
Example of How to Start a Petty Cash Fund
Let’s say you’re running a small office and you decide to establish a petty cash fund to cover small, unexpected expenses. Here’s an example of how you might go about it:
- Determine the Amount of Petty Cash Needed: You anticipate needing around $200 per month for small expenses, such as office supplies and minor repairs. Therefore, you decide to establish a petty cash fund of $200.
- Choose a Custodian: You choose your office manager to be the custodian of the petty cash fund. They will manage the fund and keep track of all transactions.
- Create a Secure Storage Space: You purchase a small lockbox to serve as the secure location for the petty cash fund.
- Withdraw Cash from the Bank: You withdraw $200 from your business bank account to establish the petty cash fund.
- Record the Withdrawal: In your accounting system, you record the withdrawal as follows:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| June 1, 2023 | Petty Cash | $200 | |
| Cash | $200 |
- Set Up a System for Tracking Expenditures: You give your office manager a ledger to record every petty cash transaction, including the date, the amount, the reason for the expense, and the person receiving the cash. You also ask them to collect and store receipts for every transaction.
- Reconcile and Replenish the Fund: At the end of June, your office manager reports that there’s $50 left in the petty cash fund. They provide receipts for $150 in expenses, which, when added to the remaining cash, equals the original $200. This means the petty cash fund is balanced.
To replenish the fund for the next month, you withdraw another $150 from the bank and record it as follows:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| July 1, 2023 | Petty Cash | $150 | |
| Cash | $150 |
Now the petty cash fund is back to $200, and ready for the next month’s small expenses. This process repeats each month, providing a controlled, documented way to manage small office expenditures.
