Petty cash is a small sum of money kept in the office to pay people back for small out of pocket expenses. The term “petty” in this case denigrates the importance and size of these transactions. Examples of when petty cash might be used include picking up a dozen donuts for special visitors, buying a get well soon card for a staffer, or mailing a letter using certified mail at the post office.
The gold standard in accounting for paying employees and volunteers back is the formal expense report. But some employees have so few expenses in a year, or the small expenses are so irregular, that keeping petty cash on hand is an easier alternative.
Many people think of petty cash as an expense type, like “Miscellaneous”, but it is not. Petty cash is actually an alternative type of bank account, like PayPal, where money is stored waiting to be used. Petty cash is also the sole method of cash disbursement for extremely small groups, such as a Meetup group or local activists, who handle only a few hundred dollars at most in a year. These tiny groups can handle their small kitty of cash using petty cash methods.
The goal of accounting procedures is transparency, to make sure the money is spent where it is supposed to be spent. A common misconception is that petty cash is there for the taking. This leads to miss-spending and abuse, such as funding a Starbucks run for employees just before payday. To prevent this casual misuse of petty cash, it needs to be tracked, with a log of how much was spent on which things and when. After the petty cash is spent down, thesumarized information on what was purchased is transferred to the main accounting books. How all this tracking and transferring gets done depends on the size of your organization but the underlying principles are the same.
Main principles for managing petty cash:
1. Lock up the cash, and have one person in charge of it.
It is best practices not to keep the petty cash money in an openly accessible place. Even something as simple as quarters for parking meters can be taken by the handful for personal laundry. It should be the responsibility of one person to give out (disperse) the money, and keep it in a locked drawer or little locked box in a physical office. If the group has no physical office space, then a zippered pouch should be used, large enough to also hold the log book and any receipts.
2. Have some rules for why the cash is spent.
In the example above [Next post!] quarters are given to visitors for parking meters. This means that staff should not use the money for their own parking or take quarters for laundry.
3. Have some rules for how to track the cash.
Depending on how the money is used, different methods can be used. Being consistent is the important thing. (I will write a separate post with details on how to do the actual paperwork.)
4. Have a time limit on the petty cash period.
Some places will take out several hundred dollars to sit in petty cash to last most of a year because it is inconvenient to do the paperwork to get the actual cash. However, the best petty cash practices close the cycle more often. The maximum length is once a year (the same financial year your organization uses), but once every three or six months is better. Two reasons why a year is too long: Too much cash is just lying around and the chance for fraud automatically increases; also people will forget the details. Then when the person closing the petty cash record is missing info and receipts, no one will remember what that money was used for.
The one exception to the time limit rule is the very small group that has no actual books or fiscal year. The cash will just keep rolling forward. Instead, this group should just add everything up each month to make sure the money is all accounted for. (See ‘monthly closing of a cash account’ for details on how to do this.) [Once I actually write it…..]