Petty cash fund definition
/What is a Petty Cash Fund?
A petty cash fund is a small amount of bills and coins that an organization keeps on the premises to pay for minor expenditures. The fund is typically replenished by the accounting department once a month. Examples of the items that may be paid for from the petty cash fund are flowers, food, office postage, presents, supplies, and taxi charges. There may be a petty cash fund in each major department of a company, so that local cash needs can be more readily met.
Petty cash funds are subject to theft, and so are commonly being replaced by corporate credit cards and employee expense report reimbursement systems.
Who is Responsible for a Petty Cash Fund?
A petty cash custodian is responsible for each petty cash fund, and maintains an up-to-date reconciliation of the amount of bills and coins remaining in it. This custodian is trained by the accounting staff in how to operate the fund. The accounting staff or internal audit staff may conduct an audit of each petty cash fund from time to time, which may result in retraining of the custodians, depending on the nature of any anomalies found.
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Disadvantages of a Petty Cash Fund
There are several problems with using a petty cash fund. These issues are as follows:
Risk of theft and misuse. Cash is vulnerable to theft, fraud, or unauthorized use, especially if controls are weak or if multiple employees have access to the fund.
Lack of accountability. Without proper documentation and receipts, it can be difficult to track how petty cash is spent, leading to a lack of accountability and potential discrepancies.
Administrative burden. Managing petty cash requires time for recording transactions, reconciling balances, and replenishing the fund, which can be cumbersome for accounting staff.
No interest income. Cash held in a petty cash fund earns no interest, representing an opportunity cost compared to keeping the money in an interest-bearing account.
Potential for errors. Manual handling and recording of petty cash transactions increase the likelihood of mistakes, such as incorrect change or recording errors.
Lack of security. Storing cash in unlocked drawers or unsecured locations increases the risk of loss or theft.
Limited usefulness. With the increasing use of corporate cards and digital payments for small expenses, the need for petty cash is declining, making it less practical.
By considering these drawbacks, businesses can evaluate whether maintaining a petty cash fund is worthwhile or if alternatives, like corporate cards or reimbursement systems, might be more effective.