You will always have petty or small expenses, in which paying those expenses by check is impractical. Expenses like food for your office meeting, taxi fare, costs of photocopying, postage and the purchase of office supplies like pens and papers are petty or small expenses. And you may think that your business will be fine losing insignificant amount of cash.
Maybe. But when you begin to realize how much potential cash loss due to fraud, you might want to rethink that perspective.
Losses due to petty cash misappropriation may add up and can contribute to significant losses for the company over time.
According to the Association of Certified Fraud Examiners, small business owners are most vulnerable to fraud and that’s because resources are limited to engage a full scale internal controls system that will divide the duties among a small number of bookkeeping staff. But all hopes are not lost for small business owners and this is the reason it is best to establish a Petty Cash Fund to cover small and miscellaneous expenses for a more efficient business operation.
In setting up the fund, start by determining how much petty cash fund you would like to establish.
For small-scale businesses, it could be any amount from $100 to $500 or higher. It all depends on the size of your business and the amount by which petty expenses are incurred each month. It should be enough to cover all your small and occasional expenses.
When you have decided the amount of petty cash fund to be established, begin drafting your petty cash risks and controls.
To prevent petty cash frauds, the following internal control procedures for petty cash should be in place:
A petty cash custodian should handle the fund and should be the only one responsible in disbursing the fund.
A Petty Cash Voucher (PCV) should be used for each payment. An authorized officer, who does not have access to the fund, will approve the request.
A PCV should contain the name of the payee, date of disbursement, purpose of the expense, amount and signatures of the approving officer, the payee and the custodian.
The PCV should be pre-numbered. It should be used accordingly in its chronological order.
The fund should always be in a safe place to prevent theft or robbery. Keep the money (bills and coins) inside a cash box, locked in a designated drawer or a safety deposit box.
Anyone who request payment from the fund should submit original copy of official receipt and other mandatory requirements. All documents should be marked or stamped “Paid” to avoid duplicate payments.
The custodian should record all disbursements in a petty cash journal. He could do it manually in a physical journal or he could do it electronically using Excel. The manual should contain all the details included in the petty cash voucher. This would facilitate reconciliation and would also enable the custodian to see the outstanding balance of cash on hand right after each payment.
There should be proper separation of duties. The petty cash custodian, if possible should not have access to record petty cash transactions in the books.
Initiate a periodic internal controls analysis of the fund. The remaining cash and the total amount of receipts with corresponding PCVs on hand should always total the established amount for petty cash fund. Your financial advisor can create a petty cash internal controls analysis checklist to see if the guidelines in handling the fund are always met and complied at all times.
With regard to the recording of the fund in the books, the Petty Cash Fund account should be added in the list of assets in the Chart of Accounts. Your financial advisor or bookkeeper would know how to set this up.
The Imprest Fund system of bookkeeping will be used to record the fund. In this system, you will see that the amount will remain constant in your financial statements particularly the Balance Sheet and Trial Balance at any given time. No other journal entries would be recorded in the General Ledger unless there is an increase or reduction in the initial amount of the fund.
When the cash is already depleted, say one half or one third has already been disbursed or when only a small amount remains on hand, the petty cash custodian should now replenish the fund. You should always remember that—
When establishing a petty cash fund, it is always best that you instill proper internal control procedures for petty cash. Although trusting your employees is a good managerial trait, you don’t wait for your staff to be tempted and see a chance to misuse the fund. It is very important that controls are in place so that the fund could be used for business purpose. Being aware of petty cash risks and controls and instituting proper internal control would deter possible misappropriation of the fund.
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