A petty cash system helps businesses pay small expenses quickly without recording each transaction. It is a separate fund of cash that is set aside to pay for supplies or other low-dollar expenses. To control the petty cash fund properly and record it correctly for tax purposes, the fund should be stored in a secure location and reconciled frequently.
Petty Cash System
While some retail businesses run small expenses out of their tills, a proper petty cash system means setting aside a fixed amount of money in a box or drawer and using it to pay for small expenses. The receipts for the expenses go into the box along with any change from the transactions. The total of the receipts and the remaining cash should always equal the amount you started with. For example, if you have a $100 petty cash fund and spend $27.52 on office supplies, your receipt for the purchase plus the remaining money in the fund will add up to $100.
The IRS requires receipts for all expenses over $75, but it is a good habit to get receipts for every petty cash transaction, no matter how small. The receipts will provide the backup to the petty cash replenishment checks when you need to top up the fund. When petty cash gets low, always check the balance with receipts before adding more. To replenish the fund, write a company check to "Petty Cash," cash it and add the money to the box. The receipts and petty cash reconciliation sheet go to the bookkeeper for entry into the accounting system.
The petty cash reconciliation sheet and receipts are the backup for the petty cash replenishment check. Enter them as one transaction in the banking register and allocate sub-totals to each category. For example, if the receipts add up to $97.12 and represent $29.88 in office supplies, $43.02 in maintenance and $24.22 in promotion, the transaction debits Bank $97.12 and credits Office Supplies $29.88, Maintenance $43.02 and Promotion $24.22.
Like any other business expense, the IRS requires that you keep receipts and other back up for seven years. Attach the receipts to the back of the petty cash reconciliation sheet and file when entered. Store your receipts out of bright light. Some receipts printed on thermal paper will fade long before the requirement for storage is met.