Petty cash refers to a small pool of money that businesses keep readily available to cover minor, day-to-day expenses.

Think of it as your office’s “quick cash fund”, used for on-the-spot purchases such as coffee for a client meeting, a courier payment, or restocking basic office supplies.

While petty cash isn’t meant for large payments, it plays a vital role in keeping operations smooth and efficient, sparing teams from the formalities of writing checks or processing small invoices for every little purchase.

In this guide, we’ll explain what petty cash is, why it’s essential for business finances, how to manage it properly, and real-world examples of how companies use it effectively.

What Is the Purpose of Petty Cash?

You might ask: “Why do we need petty cash when we already have business credit cards and online banking?”

The answer is simple, petty cash provides convenience, speed, and flexibility for handling small expenses that occur on the fly. Here’s why businesses still rely on petty cash funds:

1. Fast Transactions

Need to grab office supplies or pay a delivery fee? Petty cash allows immediate access to funds, no approvals or paperwork delays.

2. Reduced Administrative Work

Small, non-recurring purchases don’t require creating purchase orders or waiting on supplier invoices. This saves time and cuts administrative hassle.

3. Employee Empowerment

With access to petty cash, team members can handle small operational needs independently, ensuring productivity isn’t slowed by red tape.

4. Smooth Operations

Quick decisions matter, especially in sectors like retail, hospitality, or events. Petty cash ensures your team can respond instantly when small expenses arise.

Types of Petty Cash Systems

Every business handles petty cash differently depending on its size, structure, and spending habits. Below are the most common types of petty cash systems:

General Petty Cash

Used for everyday small expenses such as office stationery, travel within the city, or team refreshments. A designated custodian manages this fund and replenishes it as needed.

Imprest Petty Cash

This method sets a fixed petty cash amount that’s always restored to the same balance after each spending cycle. It’s a simple, transparent system that makes tracking and reconciliation easier.

Emergency Petty Cash

Reserved for unexpected or urgent expenses. Access is limited to specific personnel, and all transactions are carefully documented.

Discretionary Petty Cash

Allocated to department heads or managers, allowing them to make small purchases autonomously within approved limits.

Common Examples of Petty Cash Usage

To put petty cash in context, here are a few examples of when it typically comes into play:

• Buying postage stamps or courier envelopes for document dispatches.
• Purchasing snacks or coffee for client meetings or team gatherings.
• Refilling everyday office supplies like pens, sticky notes, or notepads.
• Paying for a short taxi ride to attend a nearby meeting or run a quick errand.

These small but frequent expenses can add up, and petty cash helps ensure they’re covered quickly and efficiently without interrupting daily operations.

Petty Cash Book Example and How to Manage It

A petty cash book helps you record small, everyday transactions that don’t go through formal payment channels. It keeps your records clear and ensures every small purchase is properly tracked.

Here’s a simple petty cash book example showing how such transactions might look:

Date	Description	Voucher Number	Amount
04/03/2025	Office pens and paper	001	$15.50
04/04/2025	Taxi fare for delivery	002	$22.00
04/06/2025	Client meeting refreshments	003	$30.00

Petty Cash vs. Cash on Hand

The terms “petty cash” and “cash on hand” are often confused, but they serve different purposes.

Petty Cash: A specific fund set aside for minor, day-to-day business expenses. It’s tracked in a separate petty cash log and managed by an assigned custodian.

Cash on Hand: A broader term that includes all the cash your business physically holds, such as petty cash, undeposited receipts, or money kept in tills.

In short, petty cash is a subset of cash on hand, created specifically for small, recurring operational purchases.

Petty Cash Management and Accounting Treatment

Managing petty cash effectively means setting clear rules and maintaining accurate records. Without structure, small expenses can quickly become difficult to track, leading to errors or misuse.

That’s where petty cash accounting comes in. It’s the process of recording, monitoring, and reconciling all petty cash transactions to keep your books audit-ready and compliant.

Here’s how to set up and manage a petty cash system step-by-step:

1. Assign a Petty Cash Custodian

Start by designating a petty cash custodian, a trusted employee, often from the finance or admin team, responsible for maintaining and distributing the fund.

Their duties typically include:

• Enforcing petty cash policies and spending limits
• Authorizing and approving disbursements
• Collecting and reviewing receipts
• Recording all transactions in the petty cash log
• Requesting fund replenishments
• Assisting with monthly reconciliations

Having a dedicated custodian ensures accountability and reduces the risk of errors or misuse.

2. Set an Initial Petty Cash Fund Amount

Decide how much cash to keep based on your business’s average needs. Many small companies start with $100–$300. The amount can vary depending on the frequency and size of petty expenses.

3. Establish a Petty Cash Policy

A written petty cash policy ensures consistent and responsible fund management. Your policy should clearly state:

• Who is authorized to use the fund
• What expenses qualify (e.g., stationery, courier fees, small supplies)
• Spending limits per transaction
• Documentation and receipt requirements
• Reimbursement and reconciliation procedures

This transparency helps avoid confusion and promotes compliance across your team.

4. Store the Petty Cash Securely

Keep the fund in a locked drawer or secure cash box, ideally accessible only to the custodian and authorized personnel.

5. Track Every Petty Cash Transaction

Use a petty cash log, spreadsheet, or accounting software to record every disbursement. Each entry should include the date, amount, purpose, and the person who received the funds.

6. Collect Receipts for All Purchases

Always attach a valid receipt or proof of purchase to each entry in your petty cash book. This ensures transparency and simplifies future audits.

7. Reimburse and Replenish the Petty Cash Fund

When the balance runs low, the fund must be replenished. Gather all vouchers and receipts, complete a reimbursement form, and submit it to accounts payable for approval.

Example of journal entry for replenishment:

Account	Debit	Credit
Office Supplies	$40.50
Travel Expenses	$22.00
Cash / Bank Account		$62.50

This shows how the total spent is distributed across expense categories, while the main cash account is credited.

Using petty cash management software can automate this process, letting you scan receipts, track disbursements, and reconcile with ease.

8. Reconcile the Petty Cash Regularly

Reconciliation ensures your petty cash records match the actual amount of cash remaining.

How to reconcile petty cash:

1. Count the remaining physical cash.
2. Add up all receipts and vouchers.
3. Confirm that: Remaining cash + receipts = original petty cash amount.
4. Investigate and correct any discrepancies immediately.

Reconcile at least once a month, or more frequently for high-volume petty cash usage.

Recording Petty Cash Transactions

Every petty cash transaction, no matter how small, should be accurately recorded. This ensures transparency and proper expense tracking.

Example journal entry for establishing a petty cash fund:

Account	Debit	Credit
Petty Cash	$200.00
Cash / Bank Account		$200.00

This entry transfers money from your main account into the petty cash account.

Example journal entry for recording a petty cash expense:

Account	Debit	Credit
Office Supplies	$15.50
Petty Cash		$15.50

Attach receipts to each transaction for proper documentation and audit readiness.

Best Practices for Managing Petty Cash

To keep your petty cash system efficient and secure, follow these best practices:

• Set a fixed limit for your petty cash fund.
• Record all transactions promptly using a log or digital tool.
• Reconcile the fund regularly to maintain accuracy.
• Keep all receipts and vouchers for audit purposes.
• Restrict access to a few authorized employees only.
• Store cash in a locked and secure location.
• Train your team on your petty cash policy to ensure consistent compliance.

Final Thoughts

Petty cash might seem minor, but it’s an essential part of managing business expenses efficiently. A well-monitored petty cash fund not only simplifies small payments but also builds financial transparency and control within your organization.

By maintaining proper records, assigning a responsible custodian, and setting clear policies, you can make sure your petty cash system works seamlessly, supporting your team’s day-to-day needs without financial friction.

Frequently Asked Questions (FAQ's)

Is Petty Cash an Asset?

Yes, petty cash is considered a current asset on your business balance sheet. It represents a readily available short-term resource your company owns and can use immediately for small operational expenses.

Here’s how petty cash fits into your accounting structure:

• Type: Asset
• Classification: Current Asset
• Balance Sheet Placement: Under “Cash and Cash Equivalents”

Because petty cash is physical cash your business controls, it contributes to overall liquidity. Even though the amount is small, recording it accurately helps maintain clean and reliable financial statements.

How to manage a petty cash account?

Assign a custodian, set spending limits, and record every transaction with receipts. Reconcile the fund regularly to make sure the remaining cash and recorded expenses match the original petty cash amount.

How to prepare a petty cash book?

Start by setting an initial petty cash amount, then record each expense with the date, description, voucher number, and amount. Keep all receipts attached and update the petty cash book after every transaction to maintain accuracy.

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