Petty cash is a small, fixed amount of physical currency a business keeps on hand to pay minor, incidental expenses that would be impractical to pay by check or corporate card (examples: postage, office supplies, small reimbursements, tips, cab fare). It’s usually stored securely (locked box or drawer) and overseen by a designated custodian.
Key Takeaways
– Petty cash provides a fast, convenient way to handle low-value, day-to-day expenditures.
– Typical petty cash funds range from roughly $100 to $500, depending on business size and needs.
– Companies usually operate an imprest system: the petty cash fund is kept at a fixed balance and replenished periodically.
– Internal controls (custodians, vouchers/receipts, periodic reconciliation, segregation of duties) are essential to prevent misuse.
– Replenishment is the point when expenses are recorded in the general ledger; shortages/overages are booked to an over/short account.
How Petty Cash Simplifies Everyday Transactions
– Eliminates the delay/cost of writing checks or obtaining card approvals for small purchases.
– Reduces the need for employees to pay out-of-pocket and later request reimbursement.
– Keeps low-dollar transactions off more complex procurement channels, simplifying workflow for minor needs.
Essential Rules and Controls for Managing Petty Cash
– Appoint a single petty cash custodian (or a very small, authorized group) to disburse funds.
– Define a clear petty cash policy: allowed uses, maximum single-transaction amount, receipt and voucher requirements, replenishment frequency, and approval process.
– Require petty cash slips/vouchers for every disbursement with date, amount, purpose, and requester signature; attach original receipts. The IRS recommends documenting petty cash slips/receipts.
– Keep the cash in a locked box/drawer and limit access.
– Segregate duties where possible (different person issues the check to fund/replenish the drawer than the custodian who disburses).
– Reconcile and audit the fund regularly (weekly or monthly depending on activity). Periodic surprise audits strengthen controls.
– Set a reasonable fund limit (commonly $100–$500) and review adequacy periodically.
Setting Up a Petty Cash Fund (Practical Steps)
1. Determine an appropriate imprest amount (e.g., $200) based on expected small expenses.
2. Choose and train the petty cash custodian and communicate rules to staff.
3. Create a petty cash account in the general ledger.
4. Fund the petty cash account by issuing a check to the custodian and recording the initial journal entry (see examples below).
5. Provide petty cash slips/vouchers and a log (paper or electronic) to record every disbursement.
6. Secure the physical cash and set a replenishment schedule.
How to Record Petty Cash Transactions Accurately
– Under an imprest system, individual petty cash disbursements are usually not recorded in the ledger at the time of purchase. Instead, receipts/vouchers are collected and posted at replenishment.
– Typical entries
a) Initial funding of petty cash fund:
• Debit Petty Cash (asset) — $200
• Credit Cash/Bank — $200
b) Replenishment (normal, no discrepancy) — assume receipts = $78:
• Debit Expense accounts (office supplies $50; postage $28) — $78
• Credit Cash/Bank — $78
(Petty cash asset remains at $200.)
c) Replenishment with shortage — starting fund $200, receipts $70, cash counted $120 (short by $10). Replenish amount = $80:
• Debit Expense accounts — $70
• Debit Cash Over & Short — $10
• Credit Cash/Bank — $80
d) Replenishment with overage — receipts $82, cash counted $122 (over by $4). Replenish amount = $78:
• Debit Expense accounts — $82
• Credit Cash Over & Short — $4
• Credit Cash/Bank — $78
• The Cash Over & Short account captures small variances; shortages are debited (loss), overages are credited (gain).
Step-by-Step Guide to Reconciling Petty Cash Balances
1. Count the physical cash on hand.
2. Add the total of all petty cash receipts/vouchers collected since the last reconciliation.
3. Confirm that (cash on hand + receipts total) equals the imprest fund balance. Example: $122 cash + $78 receipts = $200 imprest.
4. If equal, request replenishment for the amount needed to restore the imprest fund (imprest balance minus cash on hand). Record expenses in the ledger upon replenishment.
5. If not equal, investigate discrepancies: missing receipt, mathematical error, unauthorized disbursement, theft.
6. Prepare the replenishment check to restore the fund and record the appropriate journal entry (including any over/short line if needed).
7. File receipts, petty cash slips, and reconciliation documentation for audit and tax purposes.
More About Balancing Petty Cash in Accounting
– Petty cash is normally accounted for as an asset (Petty Cash) at its fixed imprest amount. Only when replenishing are expense accounts and cash/bank accounts affected.
– Regular reconciliation and review of the petty cash ledger and supporting documents keeps accounting accurate and deters misuse.
– Material discrepancies should be investigated immediately and reported to management.
Comparing Petty Cash and Cash on Hand: What’s the Difference?
– Petty cash: specifically small amounts of physical money set aside for minor internal business expenses.
– Cash on hand: a broader term that includes all readily available cash (register float, undeposited receipts, bank account balances, and, in accounting terms, highly liquid assets).
– All petty cash is cash on hand, but not all cash on hand is petty cash. In financial reporting, cash equivalents are short-term, highly liquid investments convertible within three months — petty cash is physical cash, not a cash equivalent.
Weighing the Pros and Cons of Using Petty Cash
Pros:
– Speed and convenience for small purchases.
– Reduces administrative burden for low-dollar items.
– Helpful for small, unexpected needs.
Cons:
– Bypasses some internal controls and can be prone to misuse if not properly managed.
– Requires administrative effort to reconcile and maintain records.
– Cash can be lost or stolen; paper-based processes can be error-prone if not digitized.
What Is Petty Cash Used For?
– Small operational needs such as office supplies, postage, low-dollar reimbursements, tips, transportation for last-minute errands, and minor facility needs where using a check/card is overkill.
Why Is It Called Petty Cash?
– “Petty” in this context means “small” in value. The term dates from business usage where petty transactions were those of minor monetary significance.
What Is an Example of Petty Cash?
– Example: A company sets a $200 petty cash fund. During the month, the custodian pays $35 for envelopes, $23 for a courier, and $20 for office snacks (receipts total $78). The custodian hands over receipts and receives a $78 check to replenish the fund. The bookkeeper posts $78 to the respective expense accounts and credits the company bank account for $78.
Is Petty Cash a Cash Equivalent?
– No. Petty cash is physical cash (an asset), not a cash equivalent. Cash equivalents are short-term, highly liquid investments readily convertible to a known cash amount (e.g., Treasury bills, money market funds) and usually have maturities of three months or less.
Important Practical Tips
– Keep receipts and petty cash slips attached and organized for each reconciliation.
– Use an electronic petty cash log or basic spreadsheet to track disbursements and speeds reconciliation.
– Set a single-person custodian but ensure oversight via regular manager review and occasional independent audits.
– Replenish regularly (weekly or monthly) to avoid large variances and maintain control.
– Limit per-item authorization amounts to reduce risk of large unauthorized disbursements.
The Bottom Line
Petty cash is a simple, useful tool to handle minor, everyday business expenses quickly. When governed by a clear policy, adequate internal controls, regular reconciliation, and accurate ledger recording at replenishment, it adds convenience without compromising financial accountability. Keep the fund appropriately sized, document every disbursement, and reconcile consistently to minimize risk.
Source
– Investopedia: “Petty Cash” (Investopedia / Madelyn Goodnight). Original content consulted
Continuing from “Petty cash can also…”
What Petty Cash Can Also Do
Petty cash can also reduce administrative friction for small, time-sensitive purchases (tips, postage, office sundries, reimbursements for staff who can’t use a corporate card). When used correctly, it saves staff time and reduces check-writing or card-transaction hassles for immaterial amounts. However, because it is physical cash and relatively uncontrolled by default, organizations should pair convenience with clear policy and controls.
Source(s)
– Investopedia: “Petty Cash”
– Internal Revenue Service guidance and best practices (see IRS publications on recordkeeping and business expenses)
Key Takeaways
– Petty cash is a small, on-premises cash fund used for minor business expenses.
– Typical petty cash balances are between $100 and $500, but the suitable amount depends on company size and transaction volume.
– Strong controls (custody, vouchers, receipts, and periodic reconciliation) are essential to prevent theft, misuse, and accounting errors.
– Journal entries are usually made when the fund is created and when it is replenished—not for each petty purchase—though receipts must tie to ledger postings on replenishment.
How Petty Cash Simplifies Everyday Transactions
– Speed: Cash payments avoid processing delays for checks and card reconciliations.
– Accessibility: Employees can make small purchases without waiting for approvals that are disproportionate to the cost.
– Practicality: Useful for purchases where vendors only accept cash (local deliveries, tips, parking).
Essential Rules and Controls for Managing Petty Cash
1. Define a petty cash policy
• Maximum fund size, allowable expense categories, approval thresholds, and documentation requirements.
2. Appoint a custodian
• One primary custodian (and a designated backup) who stores the cash in a locked box or safe and maintains records.
3. Require vouchers/slips and receipts
• Each disbursement must be supported by a petty cash voucher describing date, amount, purpose, approver, and receipt attached.
4. Segregate duties
• The person who approves replenishment or replenishes the fund should not be the only person who has exclusive access to it.
5. Regular reconciliation and surprise audits
• Reconcile at fixed intervals (weekly, biweekly, or monthly) and perform occasional unannounced counts.
6. Limit access and approvals
• Define who may request or approve petty cash disbursements; consider a supervisor sign-off for anything above a low threshold.
7. Replenish to a fixed imprest amount
• Maintain the fund at a fixed balance by replenishing to the original amount when receipts indicate the spent portion.
Step-by-Step Guide to Establishing a Petty Cash Fund
1. Determine an appropriate imprest amount (commonly $100–$500).
2. Appoint a custodian and backup custodian.
3. Purchase a lockable cash box and petty cash vouchers; establish a central storage location.
4. Fund the account:
• Issue a check from the company bank account payable to “Petty Cash” or to the custodian.
• Journal entry to establish fund:
• Debit Petty Cash (asset) $X
• Credit Cash/Bank $X
5. Distribute a copy of the petty cash policy to staff and train custodians on procedures.
How to Record Petty Cash Transactions Accurately
– Initial Funding:
• Example: Fund petty cash with $300.
• Debit Petty Cash 300
• Credit Cash/Bank 300
– Day-to-day purchases:
• No journal entries are typically recorded at the moment of each petty purchase. Instead, the custodian collects receipts and vouchers.
– Replenishment (restoring the fund to the imprest level):
• Suppose after a month you have $62 in the box and $238 of vouchers (total starting balance was $300, so $238 spent). To replenish:
• Prepare a check for $238 to replenish petty cash.
• Break down the $238 across expense accounts based on receipts (e.g., Office Supplies, Postage, Meals).
• Journal entry example:
• Debit Office Supplies 120
• Debit Postage 50
• Debit Meals 60
• Credit Cash/Bank 230 (sum of debits)
• If there is a $8 shortage or overage (receipts don’t match), use an Over/Short account (see next section).
– Closing or reducing the fund:
• If you decide to close or reduce the fund, count the cash, write a check for the remainder back to the bank or deposit it, and reverse the petty cash asset.
Handling Overages and Shortages
– On reconciliation, receipts + cash should equal the imprest amount. If not:
• Example: Imprest $300. Cash on hand $60. Receipts total $237. That sums to $297 — $3 short.
• Typical journal when replenishing $243 (to bring cash back to $300; $243 = $237 receipts + $6 over/short adjustment):
• Debit Expense accounts (as per receipts) 237
• Debit Cash Over & Short 3 (to reflect $3 short)
• Credit Cash/Bank 240
– If instead receipts + cash > imprest, credit Cash Over & Short (gain).
Important: Reconciliation Checklist (Practical Steps)
1. Count cash on hand in the petty cash box.
2. Total all petty cash vouchers/receipts since last replenishment.
3. Compute withdrawn amount = Starting imprest – Current cash on hand.
4. Compare withdrawn amount to total of vouchers/receipts.
5. Investigate discrepancies:
• Missing receipts? Arithmetic errors? Unauthorized disbursements?
6. Prepare replenishment check to bring the box back to the imprest level.
7. Post journal entries allocating voucher totals to expense accounts and any over/short adjustment.
8. File vouchers and receipts in a petty cash binder or digital folder for the accounting period.
Examples of Petty Cash Usage
– Example 1: Office supplies
• Employee uses petty cash to buy $24.50 of printer paper. Custodian gets the receipt, logs the voucher.
• When replenishing, that $24.50 is debited to Office Supplies and credited to Cash/Bank.
– Example 2: Employee reimbursement for taxi fare
• Worker gets a $15 cab home after late work; presents receipt; custodian pays from petty cash and logs the voucher.
– Example 3: Tipping for delivery
• $5 tip to a delivery person is recorded with a petty cash voucher marked “Delivery tip — [vendor]”.
More About Balancing Petty Cash in Accounting
– Frequency: Most businesses reconcile petty cash monthly, but smaller organizations with low transaction volume may do it quarterly; high-volume environments may reconcile weekly.
– Documentation retention: Keep copies of vouchers and receipts with the general ledger entries, usually for the same retention period as other financial records and tax documentation (often several years per local law/IRS guidance).
– Digital alternatives: Some organizations use prepaid corporate cards with low limits or spend-management apps in place of physical petty cash; these can improve controls and provide digital receipts automatically.
Comparing Petty Cash and Cash on Hand: What’s the Difference?
– Petty cash: Specifically the small physical cash kept for minor internal expenditures and managed via a petty cash system.
– Cash on hand: A broader term including petty cash, cash in registers, undeposited receipts, and liquid bank balances. In accounting, cash and cash equivalents include petty cash, bank balances, and short-term highly liquid investments.
Weighing the Pros and Cons of Using Petty Cash
Pros
– Quick access to small sums.
– Low administrative cost for tiny purchases.
– Minimal need for supplier paperwork for very small transactions.
Cons
– Risk of theft or misuse if controls are weak.
– Manual reconciliation can be time-consuming.
– Poor record-keeping can complicate audits and tax substantiation.
Is Petty Cash a Cash Equivalent?
– Petty cash is actual cash and therefore part of the “cash” portion on the balance sheet (and therefore included in cash and cash equivalents when preparing aggregated financial statements).
– Cash equivalents typically mean short-term, highly liquid investments convertible to a known cash amount (not the same as petty cash). So petty cash is not a “cash equivalent” in that technical sense — it is cash.
Sample Petty Cash Policy Outline (Practical Template)
1. Purpose: Provide minor cash for incidental business expenses.
2. Imprest level: $300.
3. Custodian: Name and backup.
4. Eligible expenses: Office supplies, postage, minor repairs, local transportation, small reimbursements (limit $50 per item).
5. Documentation: Voucher + receipt required for all disbursements.
6. Reconciliation: Custodian must reconcile monthly and submit vouchers to accounting.
7. Replenishment: Account payable issues check to restore imprest amount after accounting review.
8. Audits: Surprise audits twice per year by internal audit or finance manager.
9. Disciplinary actions: Misuse results in restitution and possible HR action.
Concluding Summary
Petty cash remains a practical tool for managing small, immediate business expenses. When set up with a clear policy, appointed custodian, solid documentation (vouchers/receipts), segregation of duties, and routine reconciliations, it provides convenience without compromising financial controls. Bookkeeping is straightforward if you follow the imprest model: fund the account initially, collect receipts for expenditures, reconcile at set intervals, and replenish by recording expenses and crediting the bank. For many organizations, the decision to maintain petty cash boils down to balancing convenience versus the administrative and control burdens—or replacing petty cash with low-limit corporate cards or digital alternatives if tighter control and automation are priorities.
For more detail on typical amounts, reconciliation tips, and IRS recordkeeping recommendations see:
– Investopedia: “Petty Cash”
– Internal Revenue Service guidance on recordkeeping and business expenses.