Petty cash is actual physical cash that a company keeps for a set of different uses, from postage to business lunches. It is a fund set up by a business to quickly and easily cover expenses and reimbursements that come up daily.
Petty cash is a term you might have heard but were too embarrassed to ask about. We have your back, and luckily petty cash is straightforward by nature. In a nutshell, petty cash is physical cash that is kept on hand. It is a fund set up by a business to quickly and easily cover expenses and reimbursements that come up during operations. It simplifies the reimbursement of employees for smaller business-related expenses — or negates the need to reimburse at all. If your company has a petty cash fund or is thinking about starting one, you will want to keep reading to learn how it works.
What is petty cash?
Petty cash is a small amount of money a business puts away for unexpected small expenses. Other terms used to describe petty cash include petty cash fund, petty cash account, imprest fund, or pocket money. Petty cash is also the title of the ledger used to report the use of a company’s petty cash.
Petty cash is literally cash, dollars and coins kept on hand so that a company can distribute small amounts of cash without having to write a check or use a credit card. The amount of cash kept in a petty cash fund can range from $30 to $500, depending on the size and operations of a company. This money is usually kept in a locked drawer or safe that petty cash custodians are in charge of.
Uses for petty cash funds
There are a few typical uses for petty cash. All of the uses have one thing in common: they are small expenses. This means that petty cash is not used for large operational expenses such as bulk orders of office supplies or computer software licensing.
Petty cash uses
Here are some of the most common uses for petty cash:
- Reimbursing employees’ small expenses related to work
- Extra office supplies
- Meals or snacks for small groups of employees or customers
- Small customer gifts
- Transportation expenses
The difference between petty cash and cash on hand
You may have heard the term “cash on hand.” It sounds very similar to petty cash, and it is. However, there are some key differences. Cash on hand refers to the entirety of a company’s liquid funds. Unlike petty cash, these accessible funds can be stored in cash, expense accounts, checking accounts, money market accounts, or other cash equivalents. Petty cash is kept solely in physical cash.
Furthermore, cash on hand includes (but is not limited to) cash that is exchanged with customers or clients. Petty cash is used to cover business and employee expenses and is not (normally) exchanged with customers. Cash on hand includes petty cash, but not all cash on hand is petty cash.
Petty cash or business credit card?
Some businesspeople consider using petty cash more convenient for certain things than using a business credit card. But a lot of this depends on how you like to keep records and keep track of company money. Depending on specific situations and how you like to run your business, you may find that many day-to-day expenses you’ve been covering with petty cash can be handled as well or better using a business credit card.
How does petty cash work?
A petty cash fund often operates under the imprest system. The imprest system is a simple accounting method that establishes a set amount of cash to be used for small expenses and incidentals.
To set up a petty cash fund, leaders of a company first must assess their needs, decide on a set amount of money they want to set aside as petty cash and record that amount in their ledger. They will then create a company account for this cash. When the cash is needed, they will record exact amounts distributed in the form of journal entries and petty cash vouchers. Companies must store exact change and receipts with the fund, as well.
At an interval decided upon by the company leadership, they will reconcile the journal entries and receipts, keep track of available funds, and enter values into their ledger. Finally, the petty cash custodian will replenish funds periodically as needed. The custodian will enter fund replenishments into the company’s general ledger for use in financial statements.
The petty cash custodian
The person responsible for the processes described above is the petty cash custodian. The custodian oversees the entire petty cash account. Custodians are in charge of disbursing necessary funds, recording transactions, and approving reimbursements to petty cash accounts. They reconcile petty cash receipts against petty cash expenses, monitor the petty cash balance, and safeguard the petty cash drawer or petty cash box. The petty cash custodian is usually an employee of the company delegated to the task.
The petty cashier
Larger companies may also assign a petty cashier. This is a second position, usually with less responsibility than the custodian, but who is charged with assisting in the custodial duties. The extent of petty cashier responsibilities can vary from company to company.
Petty cash fund policies
A petty cash fund is subject to internal controls. These are requirements or policies set by respective companies to make sure the fund operates securely. Internal controls often restrict the use of the petty cash fund to a select few employees. Some companies allow any employee who follows company procedures to access the petty cash fund.
A supervisor, a petty cash fund custodian, a petty cashier, or all of the above will usually have to authorize the use of petty cash. Other aspects of a petty cash fund that can be regulated are the withdrawal and deposit of funds in and out of the account, the approved uses for the cash, and recording and reimbursement procedures.
Using petty cash
A company’s petty cash policy often limits the use of funds to trusted individuals in a company or those whose roles require more frequent use of it. Typically, those individuals know they are authorized and understand the approved uses for their company’s petty cash.
An employee who needs to use petty cash — to buy lunch for a customer meeting, say — will notify the petty cash custodian. The custodian will then issue a petty cash voucher and disburse the necessary cash to the employee. The employee will purchase the lunch, then bring back the petty cash receipt and the change to the custodian, who will store both with the fund. Next comes the recording of the transaction.
Recording petty cash funds
It is the job of the petty cash fund custodian to ensure the petty cash transactions that go through the fund are recorded and reconciled. The recording usually consists of a journal entry stating what the expense was, how much it cost, how much petty cash was issued, and the change received.
A petty cash custodian will fill out petty cash vouchers, which act as another record of money disbursed. Either the custodian or the employee who completed the transaction can record this journal entry. The custodian is then responsible for recording transactions in the company’s general ledger and the petty cash balance sheet.
Petty cash reconciling
Reconciling petty cash is also the job of the custodian. A petty cash custodian must review the recorded petty cash transactions and compare them with the available funds and petty cash receipts to make sure everything aligns. This step is important to ensuring the security and accuracy of the petty cash fund. It also helps the company know when reimbursement is necessary.
Maximize your business expense tax deductions
On the subject of tax-deductible expenses, getting all your business expenses recorded is only half the battle. You also need to properly categorize them and make certain they are deductible. Tax preparation software or a tax preparation firm can help you do this more efficiently and with fewer errors.
Pros and cons of petty cash funds
Companies aren’t required by any regulatory agency to keep petty cash, but it can be a wise decision to do so. There are many advantages to having a petty cash fund, but companies should also be aware of potential disadvantages.
Here is a list of the benefits and the drawbacks to consider.
- Easy: Petty cash is available without the need for a credit card or check.
- Efficient: The funds in a petty cash account are accessible immediately for any quick business-related purchases.
- Good for emergencies: In the rare case of an issue accessing digital funds from a business’s cash on hand, petty cash can be reliable for incidental needs.
- Archaic: Cash is becoming outdated, and some retailers or restaurants have even gone cashless. Record-keeping practices for a petty cash account are often analog, and therefore require close monitoring and the diligence of all employees utilizing petty cash.
- Insecure: Although this cash is usually locked away, it is not hard for an employee to misuse the cash, whether on purpose or not. Nor is it difficult for the money to be stolen in some cases.
What is an example of petty cash?
An employee at a civil engineering firm — let’s call her Jane — needs to send hard copies of building plans to the local government office. The employee’s supervisor decides this is a good time to tap into the petty cash account to pay for postage.
Jane approaches the petty cash fund custodian — let’s call him Arnold — and asks for $10 cash to cover the shipping cost. Arnold issues a petty cash voucher and the $10 cash. Jane takes the building plans to FedEx, pays $8.50 for shipping, and gets the receipt. When she returns to the office, Jane gives Arnold the remaining $1.50 and the receipt. Arnold proceeds to record this transaction.
What is the difference between cash and petty cash?
Cash can mean a variety of forms of liquid funds. Petty cash is hard cash set aside for a specific set of purposes, small business expenses, and incidentals.
What types of petty cash are there?
It is sometimes said that there are two types of petty cash, ordinary and imprest. Really, though, cash is cash. What differs is which of two systems of petty cash accounting, the ordinary system or the imprest system, you use to manage your petty cash.
Merriam-Webster defines “imprest” as “a loan or advance of money.” One aspect of the imprest system is that it treats expenditures from the petty cash account as, in effect, advances that need to be reimbursed from another internal account. The ordinary system handles the bookkeeping a bit differently, so expenditures from the petty cash account are not treated as advances needing to be reimbursed.
What are the rules for petty cash?
Petty cash rules vary from company to company. A company’s petty cash system depends on the size of the company and the judgment of its financial team. Usually, the rules involve restrictions on who can use the petty cash, what it is used for, and the procedures for using it.
- Petty cash funds are usually kept in a lockbox or safe for ease of use for small business-related expenses or reimbursing employees without the need for checks or cards.
- Each company has its own set of petty cash rules. Whatever your company’s rules, it is important to have an organized system for disbursing, recording, reconciling, and reimbursing funds in the petty cash account.
- All petty cash is cash on hand, but not all cash on hand is petty cash. Cash on hand is a more general term that means any liquid funds, not just physical cash.
- Although petty cash may be outdated and less secure than online accounts, it does have its advantages, and many companies believe it saves them valuable time.
Keep learning about cash
In our increasingly digital age, using cash is almost a lost art. You’ve just learned about using petty cash in the business context. In case you’d like to continue your learning, here are two more SuperMoney articles about cash:
View Article Sources
- Background articles on personal finance and accounting — Various
- GAP 200.030, Petty Cash and Change Funds — Duke University Financial Services
An example of an organizational policy for handling petty cash that complies with generally accepted accounting principles (GAAP).
- Imprest — Merriam-Webster
- Publication 583 (01/2021), Starting a Business and Keeping Records — IRS
- What is petty cash? — Harold Averkamp (CPA, MBA)
- How Can I Withdraw Cash Without An ATM Card? — SuperMoney
- Remember Cash? Walking Around Money While on Vacation — SuperMoney