Disadvantages of Petty Cash
You need to develop a set of policies or procedures dictating the handling of cash in your business to avoid problems such as theft and misappropriation. Most cash should be deposited right away in the bank, but a small amount can be kept on hand in a petty cash account earmarked for minor purchases. The petty cash system will cause you numerous problems if it's not managed properly.
Your business’s petty cash system is susceptible to accounting errors because of the absence of a secondary documentation for tracking the cash. These errors manifest as discrepancies between your sales and cash receipts when reconciling the accounts at the end of the month. Discrepancies result from the petty cash custodian's failure to record the transactions accurately or to monitor the efficient use of petty cash funds. You can avoid such accounting errors by using cash vouchers to record every transaction involving petty cash.
Without proper controls, the business’s petty cash account becomes vulnerable to theft by employees, and it's hard for you to know who took the cash. Keeping large amounts of petty cash may also increase the likelihood of theft in your business. Avoid making the petty cash accessible to all employees, as this sets the stage for theft. Limit access to the petty cash account to two people and store the cash in a tamper-proof safe.
Petty cash, being a liquid asset, is prone to misappropriation by your employees without adequate controls. Some of your workers could use the cash for purchases -- such as lunch or other personal needs -- that do not benefit your business. Designate someone other than the petty cash custodian to maintain records of transactions and disbursements. Limit the use of the petty cash to purchases where checks cannot be used.
Failure to set expenditure limits for every transaction involving petty cash puts you at risk of overspending on purchases. It also necessitates a large petty cash fund, which increases the risk of theft. Ensure that your enterprise’s petty cash expenditures are appropriate by setting limits, such as $100, per expenditure.