Creating a Petty Cash Policy

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Also note: This is not legal advice.

Introduction

Creating a successful petty cash policy is essential for any organization. Not only does it help protect their financial interests, but it creates compliance with laws and regulations while also promoting a positive professional reputation. To ensure you’re covered, the Genie AI team have put together a step-by-step guide on how to construct an effective policy - and how you can access our extensive template library, free of charge.

Petty cash is often used to cover small, miscellaneous expenses in an organization - and without proper implementation, can lead to significant financial losses or disputes with customers. Clear guidelines must be outlined regarding who is authorized to access this cash; the amount available; and what can be purchased with it. Records must be kept of all transactions and receipts collected. It’s vital that you not only adhere to regulations specific to your jurisdiction but that you also demonstrate responsibility in managing finances – something which customers will admire when making purchasing decisions.

Founded in 2017, Genie AI is ‘the world’s largest open source legal template library’. Through millions of data points plus templates from its supportive community, Genie has created an AI that teaches users what constitutes a market-standard petty cash policy - leaving no stone unturned when crafting yours! What’s more: adapting these high quality documents doesn’t require payment for legal fees; just follow our guidance on how best utilise our resource today!

We hope this article has been informative on why implementing a well managed petty cash policy matters - so read on below for our step-by-step guidance and information on how you can use the Genie AI community template library without requiring an account today!

Definitions (feel free to skip)

Petty Cash Account: A small amount of cash that is set aside for the payment of small expenses.
Custodian: An individual responsible for managing the petty cash account.
Reimbursement: Money given back to an individual or business for an expense they have paid.
Disbursement: Money that is paid out from the petty cash account.
Replenishing: Refilling the petty cash account with money.
Audit: An examination of a financial record or statement to ensure accuracy.
Account Code: A unique identifier assigned to a financial account for tracking and reporting purposes.
General Ledger: A record of a company’s financial transactions.
Sub-ledger: A record of a company’s financial transactions that is part of a larger financial record.
Discrepancies: Differences between the recorded and actual amounts in a financial record.
Reconciling: Comparing the actual balance of an account to the recorded balance.

Contents

• Establishing a Petty Cash Account
• Identify the purpose of the account
• Determine the amount of cash to be allocated
• Designate a secure location for the money
• Select a custodian
• Recording Petty Cash Transactions
• Maintain a log of all transactions
• Record the details of each transaction
• Collect and store original receipts
• Stipulating Responsibilities of Petty Cash Custodians
• Clearly define the custodian’s role
• Ensure that all custodians are aware of their responsibilities
• Setting Guidelines on Reimbursements
• Establish criteria for eligible expenses
• Determine the maximum amount of reimbursement
• Establish a process for requesting reimbursement
• Setting Limits on Petty Cash Disbursement
• Outline the criteria for acceptable disbursements
• Specify the maximum amount that can be disbursed
• Establishing a Process for Replenishing the Petty Cash Account
• Establish a procedure for replenishing the account
• Set a schedule for replenishing the account
• Establishing a Process for Auditing the Petty Cash Account
• Define the scope of the audit
• Determine the frequency of the audit
• Identify the personnel responsible for conducting the audit
• Establishing an Accounting Structure for Petty Cash Transactions
• Identify the account code to be used
• Create a general ledger account
• Set up a sub-ledger
• Establishing a Process for Dealing with Discrepancies
• Create a procedure for investigating discrepancies
• Establish a process for resolving discrepancies
• Establishing a Process for Reconciling Petty Cash Accounts
• Establish a process for reconciling the account
• Set a schedule for reconciling the account
• Designate a person responsible for reconciliation

Get started

Establishing a Petty Cash Account

• Contact your bank to set up an account specifically designated for petty cash
• Decide what type of account you would like to set up (e.g. checking, savings, etc.)
• Set up a signature card with the names of all authorized signers
• Decide how much money to keep in the account
• Decide who will have access to the account
• Create a petty cash log to track all transactions
• When you’ve completed all of the above, you can move on to the next step: Identifying the purpose of the account.

Identify the purpose of the account

• Identify the purpose of the petty cash account, such as to provide change for customers, or to cover small purchases or reimbursements.
• Determine whether the petty cash account will be used for business-related or personal expenses.
• Set expectations for how the account will be used, including who is authorized to make withdrawals.
• Establish a system for documenting and tracking all transactions.
• When complete, document the policy and communicate it to all relevant personnel.

Once you have identified the purpose of the petty cash account, documented the policy and communicated it to all relevant personnel, you can move on to the next step in creating your Petty Cash Policy.

Determine the amount of cash to be allocated

• Estimate the amount of money needed to cover petty cash expenses.
• Consider the frequency of transactions and the amount of money typically required for each transaction.
• Determine the maximum amount of money to be allocated for the petty cash account.
• When you have determined the maximum amount, you can move on to the next step.

Designate a secure location for the money

• Identify a place to store the petty cash that is secure, such as a lockable desk drawer or cabinet
• Ensure that the area is not accessible to anyone other than the designated custodian
• Consider how often the petty cash will need to be accessed, and choose a location that is convenient
• Once you’ve found the right secure location, you can check this step off your list and move on to selecting a custodian.

Select a custodian

• Select an employee who is reliable, trustworthy and organized for the role of custodian
• Select a custodian who will be solely responsible for maintaining and tracking petty cash
• Discuss the role of the custodian and their expectations with them
• Have the custodian sign a document stating that they understand their role and responsibilities
• Once the custodian has agreed and signed the document, you will have successfully selected a custodian for the petty cash policy

Once the custodian has agreed and signed the document, you can check this off your list and move on to the next step.

Recording Petty Cash Transactions

• Ensure that all petty cash transactions are recorded in a log book or accounting software
• Record the date of the transaction, the amount, what it was used for, who it was given to, and any other relevant details
• Make sure to have the custodian sign off on all transactions and keep a copy of any receipts
• You will know this step is complete when all transactions have been documented and signed off by the custodian.

Maintain a log of all transactions

• Create a log to document all petty cash transactions
• The log should include the date, description, amount, and initials of the recipient
• List the starting balance at the top of the log
• Update the log with each transaction
• Keep the log in a secure location
• When the log is completed, it can be used to check that all petty cash transactions have been accounted for and the balance is correct.

Record the details of each transaction

• Record the date, amount, and the purpose of each transaction in a log book
• For each transaction, note who authorized the expenditure and who received the petty cash
• Include a description and a receipt (if applicable) for each transaction in the log book
• Once all details are recorded, you can check this step off your list and move on to the next step.

Collect and store original receipts

• Ensure that original receipts are collected for every petty cash transaction
• Designate a secure location to store petty cash receipts
• File petty cash receipts in chronological order
• When all receipts are collected and stored, you can move on to the next step - stipulating responsibilities for petty cash custodians.

Stipulating Responsibilities of Petty Cash Custodians

• Determine who will be the custodian for the petty cash fund
• Decide what types of purchases are allowed with the petty cash fund
• Outline the process for requesting petty cash from the custodian
• Explain in detail the responsibilities of the custodian
• Make sure the custodian understands the importance of recording all petty cash transactions
• Make sure the custodian is aware of the consequences for failing to maintain accurate records

Once all the responsibilities of the custodian have been outlined and clearly defined, then this step can be marked as completed and the next step can be started.

Clearly define the custodian’s role

• Outline the custodian’s role and responsibilities
• Clearly define who is responsible for the management of petty cash funds
• Establish who is authorized to access and sign off on petty cash payments
• Specify the rules and regulations that should be followed when using petty cash
• Set up a system to ensure that all custodians are aware of their duties

Once you have outlined the custodian’s role and responsibilities, you have completed this step and can move on to the next step: Ensuring that all custodians are aware of their responsibilities.

Ensure that all custodians are aware of their responsibilities

• Meet with all custodians to ensure they understand their role and responsibilities in handling and managing the petty cash fund
• Explain to them the importance of having and adhering to the petty cash policy
• Provide them with a copy of the policy and answer any questions they might have
• Have custodians sign a document stating that they understand their role and responsibilities
• Keep a signed copy of this document for your records

Once you have completed this step and all custodians have signed the document, you can move on to the next step: setting guidelines on reimbursements.

Setting Guidelines on Reimbursements

• Establish clear guidelines for reimbursements that detail how and when employees can request reimbursements
• Create a standard reimbursement form that should be filled out and submitted to the Petty Cash Custodian
• Set a maximum amount that can be reimbursed without prior approval
• Outline any documentation or proof that must be provided when requesting a reimbursement
• Specify the timeframe that a reimbursement should be processed within
• When you have established your guidelines for reimbursements, you can check this step off your list and move on to the next step.

Establish criteria for eligible expenses

• Create a list of types of expenses that will be eligible for reimbursement
• Determine the level of documentation that will be required for each type of expense
• Identify any restrictions on the type of expenses that will be reimbursed
• Establish any approval requirements for certain types of expenses
• When you have completed creating the list of eligible expenses, documentation requirements, restrictions, and approval requirements, check the step off your list and move on to determine the maximum amount of reimbursement.

Determine the maximum amount of reimbursement

• Determine the maximum amount of money that can be stored in the petty cash fund.
• Consider the frequency and types of expenses that will be reimbursed from the petty cash fund.
• Consider the budget for the organization and the potential impact of the petty cash fund on the budget.
• Set a maximum amount of money that can be taken from the petty cash fund at any one time, as well as a maximum amount of money that can be stored in the fund.
• Document the maximum amount of money that can be taken from the petty cash fund and stored in the fund in the petty cash policy.

Once you have determined the maximum amount of money that can be taken from the petty cash fund and stored in the fund, you can check this off your list and move on to the next step.

Establish a process for requesting reimbursement

• Create a form that will be used to request reimbursement from the petty cash fund
• Include fields such as date, purpose of expense, amount of reimbursement, name, and signature
• Ensure the reimbursement form is easily accessible to staff
• Establish a system for approving and denying reimbursements
• Make sure all staff is aware of the reimbursement process and understands when and how to make a request
• Once a system is in place to manage requests, you can check this step off your list and move on to the next step of setting limits on petty cash disbursement.

Setting Limits on Petty Cash Disbursement

• Create a limit for the amount of money that can be withdrawn from the petty cash fund at any one time
• Set a maximum amount that an employee can be reimbursed from petty cash
• Establish a frequency for the replenishment of the petty cash fund
• Implement a procedure for recording all disbursements
• When these limits have been set and communicated to all employees, the task is complete.

Outline the criteria for acceptable disbursements

• Establish criteria for what types of expenses are eligible for a petty cash reimbursement
• Examples might include postage, office supplies, and other small day-to-day purchases
• Set up a list of vendors that are approved to provide the goods and services that can be purchased with petty cash
• Ensure that the goods and services are necessary and necessary for the company’s operations
• Make sure that all purchases are documented and that the person responsible can be identified
• When you have established the criteria and approved vendors, you can move on to the next step.

Specify the maximum amount that can be disbursed

• Decide on a maximum amount that can be disbursed from the petty cash account.
• Consider budget allowances, the frequency of disbursements, and the size of individual disbursements when determining the maximum amount.
• Document the maximum amount and make sure it is included in the policy.
• When the maximum amount has been established and documented, the step can be marked as complete.

Establishing a Process for Replenishing the Petty Cash Account

• Decide how often the account should be replenished (e.g. monthly or quarterly).
• Choose the person or persons responsible for replenishing the account.
• Establish a set day and time for the account to be replenished.
• Decide who has the authority to approve the replenishment of the account.
• When the account is replenished, document the amount, who added the cash, and who approved it.

When you can check this off your list and move on to the next step:

• When the process for replenishing the account is established and documented.

Establish a procedure for replenishing the account

• Create an expense form that employees need to fill out when requesting money from the petty cash fund.
• Establish a timeline for when the forms need to be submitted for review.
• Make sure to include a line item for the employee to indicate what the money is for.
• Have a designated person in charge of reviewing and approving the forms.
• Set up a process for replenishing the account with funds when it gets low.
• You will know you have completed this step when you have a procedure in place for replenishing the account with funds when it gets low.

Set a schedule for replenishing the account

• Determine the frequency of replenishment and set a calendar reminder for it
• Consider setting up an automatic payment to ensure the account is replenished on time
• Decide who will be responsible for replenishing the account and identify necessary information for that person
• When the scheduled replenishment has been completed, check it off the list and move on to the next step

Establishing a Process for Auditing the Petty Cash Account

• Decide who will be in charge of auditing the petty cash account.
• Determine how often the audit should take place (e.g. monthly, quarterly).
• Make sure the auditor has access to all the records and information related to the petty cash account.
• Lay out a clear process for the audit, including specific steps the auditor should take and what they should be looking for.
• Determine what kind of information should be included in the audit report.
• Set up a system for tracking the results of the audit.
• When all of the above steps are complete, you can move on to the next step in the process.

Define the scope of the audit

• Identify who will be responsible for performing the audit
• Determine how long the audit will last
• Define the specific areas to be audited
• Establish the specific procedures and processes to be used
• Set the criteria for determining accuracy and completeness
• Establish a timeline for the audit
• When the above steps are completed, the scope of the audit is defined and the next step can be taken.

Determine the frequency of the audit

• Establish regular intervals for when the audit should be conducted, such as monthly or quarterly
• Decide how often to review the petty cash policy and make any necessary updates
• Document the frequency of the audit in the policy, including the date of the last audit
• When the audit is complete, document the findings, any changes made, and the date of the next audit
• Once the frequency of the audit is determined and documented, check this off your list and move on to the next step.

Identify the personnel responsible for conducting the audit

• Identify personnel who have the authority and expertise to conduct the audit.
• Ensure that the personnel have a good understanding of the policies and processes related to petty cash.
• Provide training to the personnel on the importance of maintaining accurate records, and the consequences of failing to do so.
• When personnel have been identified and trained, the step can be checked off the list and the next step can be completed.

Establishing an Accounting Structure for Petty Cash Transactions

• Determine the type of accounting system you will use to record petty cash transactions.
• Assign a unique account code to petty cash transactions.
• Establish a petty cash journal to document all transactions.
• Create a petty cash reconciliation form to compare the cash balance against the record of transactions.
• Determine the types of receipts that will be accepted when reimbursing petty cash expenses.
• When all the above steps are complete, you can check this off your list and move on to the next step.

Identify the account code to be used

• Decide on an account code for petty cash transactions
• Use a unique code for petty cash transactions that can be easily identified in the accounting system
• Make sure to communicate the account code to all staff that will be handling petty cash transactions
• Once you have identified the account code, you can move on to creating a general ledger account.

Create a general ledger account

• Decide which type of software to use to create the general ledger account
• Enter the account code and name of the account into the software
• Assign the account to an appropriate category
• Set the account balance to 0
• Record the account in the software
• Once you have a new account, you can check this step off your list and move onto the next step.

Set up a sub-ledger

• Create a separate ledger for petty cash expenses.
• Designate a custodian to manage the petty cash ledger and make sure it is regularly reconciled against the general ledger.
• Track petty cash expenses in the sub-ledger, including details such as the date, payee, and purpose.
• Reconcile the petty cash ledger with the general ledger on a regular basis.

When you have set up a sub-ledger, you’ll know you can move on to the next step when you have created a separate ledger for petty cash expenses, designated a custodian to manage the petty cash ledger and make sure it is regularly reconciled against the general ledger, and tracked petty cash expenses in the sub-ledger with details such as the date, payee, and purpose.

Establishing a Process for Dealing with Discrepancies

• Create an official process to follow when a discrepancy is found between the petty cash ledger and the actual cash on hand
• This process should include a way to document discrepancies and the corrective action taken
• Make sure the process is simple and easy to follow
• Once the process is established and documented, it will be complete and you can move on to the next step.

Create a procedure for investigating discrepancies

• Develop a consistent procedure for investigating discrepancies in the petty cash fund.
• This should include a standard process for documenting each discrepancy and the action taken to investigate it.
• Document the process for investigation, ensuring that it is easily accessible for all personnel.
• Establish a timeline for investigation, including when discrepancies must be reported and when the investigation should be completed.
• Develop a system for keeping records of all investigations and the results.
• When the investigation is complete, document the findings and the actions taken to resolve the discrepancies.

Once you have finished creating the procedure for investigating discrepancies and documenting the process, timeline, and system for keeping records, you can check this off your list and move on to the next step.

Establish a process for resolving discrepancies

• Establish a clear process for resolving discrepancies in petty cash accounts.
• Determine who will be responsible for resolving discrepancies and how the process will be communicated to all staff.
• Decide if the discrepancies will be investigated by the person responsible for reconciling the petty cash accounts or if it will be conducted by an auditor or a third-party.
• Set a timeline for resolving discrepancies and follow-up to ensure that any issues are addressed in a timely manner.
• Document the processes and procedures that you have put in place and make sure they are updated and communicated whenever changes are made.

You will know when you can check this off your list and move on to the next step when you have established a clear process for resolving discrepancies, determined who will be responsible for resolving discrepancies, decided how discrepancies will be investigated, set a timeline for resolving discrepancies, and documented the processes and procedures that you have put in place.

Establishing a Process for Reconciling Petty Cash Accounts

• Create a dedicated petty cash account for each location or department.
• Appoint an employee to be the custodian of the account and ensure that they are well-trained on the proper use and accounting of the petty cash fund.
• Set up a petty cash log to track all transactions and ensure that the total amount of the petty cash receipts matches the total amount of the petty cash disbursements.
• Regularly review the petty cash log to identify any discrepancies or irregularities in the transactions and reconcile the account as needed.
• Establish a policy for reconciling the petty cash accounts that includes the frequency of reconciliation and the procedures to follow when discrepancies are identified.

How you’ll know when you can check this off your list and move on to the next step:
Once you have established a policy for reconciling the petty cash accounts with the appropriate frequency and procedures for resolving discrepancies, you will know that you have completed this step and can move on to the next step.

Establish a process for reconciling the account

• Create a reconciliation process that outlines the procedure for reviewing, verifying and reconciling petty cash expenses.
• Establish a system for identifying and recording expenses, such as receipts and invoices.
• Determine who will be responsible for reconciling the petty cash account and how often it should be done.
• Create a written policy to ensure the system is followed.

You can check this off your list when you have created a written policy outlining the procedure for reconciling petty cash expenses and assigned someone to be responsible for reconciling the account.

Set a schedule for reconciling the account

• Decide on the frequency of reconciliation - this could be weekly, bi-weekly, monthly, or yearly
• Determine who will be responsible for the reconciliation and have them set a reminder or calendar event for the scheduled date and time
• Communicate the schedule to all relevant stakeholders
• When the reconciliation is complete, mark it off your list and move on to the next step
• Review and adjust the schedule as needed to ensure the account is being reconciled at the desired frequency

Designate a person responsible for reconciliation

• Choose an employee to be responsible for tracking and reconciling the petty cash account
• Make sure the person is trustworthy and understands the importance of accuracy
• Give them the authority to make decisions about petty cash and access to all records related to the petty cash account
• Provide them with the necessary resources, such as a cash box and key to the box
• Make sure the person understands the policy and procedures for handling and reconciling the petty cash account
• When the person has been designated, check this step off your list and move on to the next step.

FAQ:

Q: Could a petty cash policy help me to stay compliant with EU laws?

Asked by Jane on February 14th 2022.
A: A petty cash policy is an important part of any business’s operations, regardless of its size or location. Depending on the size and scope of your business, you may need to adhere to certain regulations from the EU or other local governments. It is important to consult with a legal advisor to ensure that your policy meets all relevant laws and regulations. Generally speaking, a petty cash policy will help you stay compliant by providing clear guidelines for how employees should handle cash transactions, as well as a system of accountability.

Example dispute

Lawsuits involving Petty Cash Policies

• A plaintiff may raise a lawsuit referencing a petty cash policy if they believe that the policy has been violated in some way, resulting in harm to them.
• For example, if the plaintiff believes that the petty cash policy was not followed and that this resulted in money being taken from them without their knowledge or consent, then they may pursue a lawsuit.
• The plaintiff can use the petty cash policy as evidence that the company was negligent in following the policy and that this negligence resulted in them suffering a financial loss.
• The plaintiff may also be able to seek damages for any costs incurred as a result of the violation of the policy, such as medical bills or lost wages.
• Settlement could be reached through negotiation or mediation between the plaintiff and defendant. If the case goes to court, the judge may award damages to the plaintiff based on the evidence presented.
• Damages are typically calculated based on the amount of harm caused by the violation of the policy. The court may also consider any additional costs incurred, such as legal fees, in determining the amount of compensation.

Templates available (free to use)

Petty Cash Policy

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