Petty Cash vs. Expense Report Overview

Petty Cash vs. Expense Report Overview

There are two acceptable ways to handle small business expenditures. 

1. Petty cash system.  The fund is established and kept in a secure place.  At any point the total in the fund should be the same (including cash and receipts).  When the fund runs low on cash, the receipts are removed, a check is written for the total of the receipts (and coded appropriately to office supplies, postage, tolls, etc), and the check is cashed to replenish the fund.  On the accounting software there is an amount coded to the Petty Cash Bank account when the fund is established, but there should be no subsequent entries unless the amount in the fund is to be increased or decreased permanently. 

With a petty cash fund the accounting procedures would be as follows:

1. Decide how much of a fund is necessary (we will use $100 in this example).
2. Establish the petty cash fund by issuing a check written to cash and coded to a petty cash bank account (i.e. cash on hand).
3. Cash the check and place the money in a safe, secure place (maybe a lock box kept in a desk?)
4. As money is spent, receipts are accumulated. The total in the box should always equal the amount of the fund: $100 in our example.  This includes receipts, cash, or a combination of both.
5. When the cash gets to be replenished, the receipts are removed and a check is issued to cash for that exact amount.  The check should be coded as it is entered based on the receipts.
6. The check is then cashed and the money replenished.

Alternative: Although it is possible to enter each receipt into the petty cash register in an accounting system, most small businesses do not want to keep that level of detail in the system and/or invest the time in the data entry of small expenditures.

2. Expense reimbursement system.  This process is easier from a data entry and reconciliation perspective.  Each individual pays for the small business expenditures then submits an expense report with receipts attached.  A check is written to the individual (and coded to the appropriate accounts based on the receipts).

Summary:

A petty cash fund is most effective when there are small amounts that need to be spent on an infrequent basis.

Expense reports work best when an individual pays for amounts when out of the office (and therefore not close to the petty cash fund) or when expenditures happen frequently or for larger amounts.

More information on this topic

Cash Flow Overview