Lesson 44 - Beginner accounting course

44. Petty Cash and Cash Control Measures

Petty cash is a small amount of cash kept on hand to pay for minor expenses, such as office supplies, postage, or employee reimbursements. Managing petty cash properly is essential for preventing fraud, errors, and mismanagement.

1. What is Petty Cash?

Petty cash is a small fund set aside for immediate, small-scale expenses that are impractical to pay via check or bank transfer. It is usually maintained by a designated employee called the petty cash custodian and follows a formal replenishment system.

2. Establishing a Petty Cash Fund

To set up a petty cash fund, a company withdraws a fixed amount of cash (e.g., $200) and records the transaction in the accounting system:

3. Petty Cash Expenses and Reimbursement

Recording Petty Cash Transactions

Whenever petty cash is used, the custodian must record the details and keep receipts.

At the end of the accounting period, these expenses are recorded in the books. 

Replenishing Petty Cash

When funds run low, the petty cash custodian requests replenishment. If $65 has been spent, the company withdraws another $65 to restore the petty cash balance:

4. Cash Control Measures for Petty Cash

To prevent misuse or theft, companies implement strict controls:

1. Fixed Fund Amount – The petty cash fund should have a set limit (e.g., $200).

2. Custodian Responsibility – A single, designated custodian manages and records all transactions.

3. Receipts for Every Transaction – Every petty cash expense must be supported by a receipt.

4. Regular Audits – Periodic reviews ensure the fund is used correctly and matches records.

5. Approval for Replenishment – A supervisor must approve and verify expenses before replenishing funds.

6. Separation of Duties – The person authorizing expenses should not be the same person managing petty cash.

5. Importance of Cash Control Measures

Implementing cash control measures ensures:
- Protection against theft and fraud
- Accurate financial reporting
- Compliance with company policies
- Prevention of unauthorized expenses

By maintaining strict records and proper authorization, businesses can efficiently manage small cash transactions without financial risk.