Financial Accounting & The Importance of Financial Statements

Why Petty Cash

Why Petty Cash? It is the difference between sloppy bookkeeping and managing your money properly. You have your own small business, so why not grab a twenty out of the till when you need some pocket money? It may not be the end of the world if you do, but it presupposes a certain attitude toward your business.

Keeping track of your finances is one of the most important tasks a business owner has. A lackadaisical approach in this area can spell trouble. For instance, I’ve seen owners who are shocked to find a major discrepancy between the cash receipts and the sales when they are reconciled at the end of the month. They had no idea they were taking that much money out for lunches, etc. In addition, what if you have employees who decide they can dip into the till? There is no way to know who took the cash, the owner or the employee. In accounting, this is an issue known as “Internal Control“. Internal controls are established to maintain the integrity of the accounting system. These are procedures that provide checks and balances to ensure that the figures reported on a financial statement are what they say they are.

In a small business that is large enough to have employees who handle bookkeeping functions such as preparing a bank reconciliation, making bank deposits, and recording entries into the general ledger, an internal control procedure known as the “division of labor“ should be instituted. Division of labor means that the same person preparing the bank reconciliation should not also make the bank deposits. The theory here is that it is less likely that two employees will “collude“ with each other to commit a crime.

The petty cash system is part of a company’s internal control procedures. A set amount, such as $100 is established by withdrawing the cash from the bank and placing it in a separate locked box. When cash is removed from the box, a voucher is filled out for the exact amount of cash and signed by the person removing the cash. This voucher amount and the remaining amount of cash in the box must total $100. When the item is purchased, the receipt is placed in the box in lieu of the voucher. If the box were audited, the auditor would find receipts, vouchers, and cash that equal $100.

You can find locking cash boxes and pads of petty cash voucher slips at your local stationer store. If your business is small enough not to warrant a petty cash box, then you should at least use the voucher slips to replace any money you take out of the cash register till. Follow the same procedures above, and you will always know where your cash went and what it was spent for.