How to manage petty cash

business.gov.au defines petty cash as cash for small miscellaneous purchases, such as postage. It is part of the business's cash: business.gov.au's definition of cash covers bank notes and coins and petty cash, as well as money held in bank accounts.

Petty cash suits small, occasional costs where a card payment or an invoice isn't practical. Regular or larger costs are better paid from the business bank account, where the bank statement gives you a second record of each one.

Petty cash purchases are business expenses like any other. business.gov.au lists records of all business expenses, including cash purchases, among the records a business needs to keep.

A common way to run petty cash is an imprest float. You decide a fixed amount for the fund, called the float, and from time to time you top it up by exactly the amount that has been spent.

The rule that makes it work is simple. At any moment, the cash in the box plus the receipts for what has been spent should add up to the float. If they don't, something is missing or unrecorded, and you find out at the next count rather than at the end of the year.

Set the float at an amount that covers a typical period's small purchases without leaving more cash on hand than you need. If you find yourself topping it up very often, or the cash barely moves, change the float.

1. Choose one person to look after the cash, the custodian, and someone to stand in when they are away.
2. Decide what petty cash can be used for and the largest single payment it can make. Anything above that goes through your normal payment process.
3. Withdraw the float from the business bank account and record it in your books as a transfer from the bank account to a petty cash account.
4. Keep the cash in a locked box or drawer, apart from sales takings and anyone's personal money.
5. Start a petty cash log, on paper or in a spreadsheet, and a set of numbered vouchers.

The ATO says a record generally needs to show the date, the amount and a description of the transaction, and its purpose. For petty cash, that means each payment gets a voucher showing:

• the date and the amount
• what was bought and why
• who was paid, and who took the cash
• the supplier's receipt, attached.

If there is no receipt, write the details on the voucher and have the person who spent the money sign it. Change goes straight back into the box, and the voucher shows only the amount actually spent.

Then enter the payment in the log. A running balance shows how much cash should be in the box.

When the cash runs low, or at a set time such as the end of each month, bring the fund back to the float.

1. Add up the vouchers and count the cash. Together they should equal the float.
2. Enter each payment in your books against the right expense account, such as postage or cleaning, with petty cash as the account the money came from.
3. Withdraw exactly the total of the vouchers from the business bank account and put it in the box.
4. Record the top-up in your books as a transfer from the business bank account to the petty cash account, enter it in the log and file the vouchers with that period's records.

Because the top-up equals what was spent, each expense reaches the books once, when you top up, and the petty cash account returns to the float.

The ATO's record-keeping tips include keeping accurate records of all cash transactions, reconciling cash sales regularly by checking your own records against outside ones, and checking for mistakes when things don't add up. The same habit of regular checking suits the cash going out.

Count petty cash at each top-up, whenever the custodian changes, and now and then without notice. Cash plus vouchers should equal the float. If it doesn't:

• look for a voucher that is missing or filed in the wrong place
• check the arithmetic in the log
• ask whether change wasn't returned or a payment wasn't written up.

If a difference still can't be explained, record it as a cash shortage or overage rather than adjusting the log to hide it. A difference that keeps coming back is a reason to look more closely at how the fund is handled.

• Have one custodian, so it is clear who is responsible for the cash.
• Allow no IOUs, personal loans or cashing of personal cheques from the fund.
• Keep petty cash separate from sales takings, and bank the takings.
• Have someone other than the custodian count the fund from time to time.
• Keep the vouchers and receipts. They are records of cash purchases, and business.gov.au says most business records need to be kept for 5 years.