Understanding Petty Cash: Definition, Functions, Types, and How to Manage It

Managing small expenses in a business can be challenging if not properly recorded. That’s why understanding petty cash is crucial. 

Without proper documentation, small expenses can be overlooked, uncontrolled, and may even impact the company's financial condition.

Let’s dive deeper into petty cash in this article!

Understanding Petty Cash

In business operations, numerous small transactions must still be recorded to maintain financial transparency. 

Petty cash is a small cash fund set aside by a company to cover minor operational expenses. 

This fund is used for daily needs, whether routine or unexpected, without going through lengthy administrative procedures. 

To ensure controlled usage, companies usually set a specific amount for each period.

Every transaction using petty cash must have clear proof. A petty cash voucher is a document used to record expenditures from the petty cash fund. 

This document contains details such as the amount spent, purpose of use, and the signature of the authorized party. 

With petty cash vouchers, transactions can be tracked more accurately.

Additionally, petty cash records must be neatly maintained in an accounting journal. A petty cash journal records all petty cash transactions over a specific period. 

This journal is essential for ensuring that petty cash expenses are well-documented and can be reconciled with the company’s financial reports.

To make it easier to monitor petty cash flow, all transactions are also summarized in a dedicated petty cash record. 

This record contains complete details of each petty cash transaction, including the date, amount used, and purpose. 

Through these records, companies can control expenses and ensure that petty cash is used according to the budget.

Although the amount may seem small, without proper management, petty cash can become a financial leakage point. 

Therefore, disciplined record-keeping and regular supervision are essential to ensure that every transaction is clearly documented and aligns with company policies.

Read more: Financial Reports: Types, Benefits, and Their Importance for Businesses

Functions of Petty Cash in Business

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Petty cash plays a vital role in business financial management. Although small in value, this fund helps ensure smooth business operations. 

Here are some key functions of petty cash:

1. Simplifying Small Expense Recording

Not all business transactions involve large amounts. Petty cash is used to cover minor operational needs, such as office supplies or meeting refreshments. 

With separate records, business finances become more organized and transparent.

2. Reducing the Accountant’s Workload

Petty cash bookkeeping helps accountants in preparing financial reports. 

By separating small transactions from major expenses, financial analysis becomes more accurate and efficient.

3. Serving as an Emergency Fund

Every business may face sudden needs. Petty cash can be used to cover unexpected expenses without waiting for lengthy approval processes.

4. Preventing Misallocation of Payments

Petty cash ensures that minor transactions are not mixed with large payments. 

With a separate bookkeeping system, every expense is easier to track and control.

Petty Cash Recording Methods

In petty cash management, there are two common recording methods, Imprest Fund System and Fluctuating Fund System. 

Each method works differently based on company policy. Here’s an explanation:

1. Imprest Fund System

The imprest system is a petty cash recording method where the cash balance always remains at a predetermined amount. 

Expenses are not immediately recorded in the journal but are first collected as transaction proof.

When the petty cash fund is nearly depleted, the company replenishes it with the exact amount of previous expenses. 

This ensures that the petty cash balance always returns to its original amount.

The process starts with a company providing a set amount of petty cash to the custodian for operational needs. 

The fund is then used as necessary while transaction receipts are collected.

Once the balance is low, the company refills it with the same amount as the total expenditures. 

This method ensures better financial control and simplifies daily operational fund management.

2. Fluctuating Fund System

Unlike the imprest method, the fluctuating system allows petty cash amounts to change based on needs. 

There is no fixed balance, so companies can adjust the replenishment amount according to operational requirements.

For example, if the initial petty cash fund is IDR 5 million, the replenishment amount does not have to match the original balance. 

It can be more or less, depending on previous usage.

In this method, each transaction is recorded by debiting the expense account and crediting petty cash, while the available funds are adjusted according to the company’s operational needs. 

This method is more flexible and suitable for companies with dynamic petty cash requirements. Both the imprest and fluctuating methods have their advantages. 

The choice of method depends on company policy and the desired level of control over petty cash management.

Read more: Don't Get It Wrong! This is an example of a correct sales journal for your business

Conclusion

Properly managing petty cash is essential for maintaining business financial stability. 

By keeping organized records through a petty cash book and petty cash journal, businesses can track small expenses without losing transaction details.

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