Petty Cash Everything You Need to Know for Effective Business Finance
965 reads · Last updated: November 26, 2025
Petty Cash is a small amount of cash kept on hand by a business or organization to cover minor, everyday expenses. These expenses typically include office supplies, transportation costs, and small employee reimbursements. The purpose of maintaining a petty cash fund is to simplify and expedite the handling of small payments, avoiding the need for frequent check writing or bank transfers. Petty cash is usually managed by a designated custodian, and each use of the fund requires a petty cash voucher to be filled out. Regular reconciliations are conducted to ensure the proper use of funds and the accuracy of records.
Core Description
- Petty cash is a fixed, small cash float used by organizations to cover incidental expenses promptly, without engaging the full accounts payable workflow.
- Its effectiveness relies on clear limits, strong documentation, regular reconciliations, and well-defined custodianship, balancing convenience with internal controls.
- Although digital tools offer alternatives, petty cash remains relevant in situations where cash is preferable or required, supported by established practices and audit procedures.
Definition and Background
Petty cash refers to a small, pre-set reserve of physical currency held by organizations to pay for minor, often urgent business expenses when standard procurement processes are impractical. The fund typically operates on an imprest system—the authorized petty cash amount remains constant and is periodically replenished to cover disbursements documented by vouchers and receipts.
Historical Context
The use of petty cash has existed for centuries, originating from early merchants and guilds who needed on-hand funds for messenger fees, tolls, and miscellaneous expenditures. As business operations expanded during the Industrial Revolution, organizations established formal petty cash procedures, including ledgers, custodianship, and regular reconciliations. Today, although electronic payments are common, petty cash remains useful in cases involving cash-only vendors or urgent needs outside standard banking hours.
Reasons Businesses Use Petty Cash
Businesses maintain petty cash primarily for speed and efficiency. It eliminates the administrative burden of processing a formal invoice or reimbursement for low-value items, such as refreshments for meetings, taxi fares, or last-minute office supplies. By implementing clear policies and audit trails, petty cash supports continuous operation while limiting delays.
Calculation Methods and Applications
The Imprest System
Organizations generally use the imprest system to manage petty cash. The process is as follows:
- Float Establishment: Decide on an appropriate fund value based on typical weekly or monthly requirements, plus a modest buffer for unexpected needs. For example, a retail shop may set a petty cash float of USD 300, informed by historical data and anticipated frequency of small expenditures.
- Disbursement and Record-Keeping: A custodian dispenses cash against signed, pre-numbered vouchers. Each voucher records the date, amount, purpose, requester, and is accompanied by a receipt.
- Replenishment Cycle: When the cash on hand dips below a set threshold, receipts are totaled and submitted to accounting. The fund is then replenished via bank payment to restore it to its original amount.
- Reconciliation: At all times, cash on hand plus vouchers must equal the approved float. Variances are investigated and recorded.
Common Expense Applications
- Retail Stores: Petty cash covers urgent needs such as change for transactions or emergency supply purchases. For example, a hypothetical boutique in Brooklyn may use petty cash to restock gift wrap before a busy sales period, with shift managers reconciling the cash drawer daily.
- Restaurants and Cafes: Used for last-minute purchases of perishables, tip floats, or staff transportation, supporting continuity of service.
- Healthcare Clinics: Covers change for patient co-payments, courier fees for urgent lab samples, or parking validations.
- Construction Sites: Supports quick acquisition of fuel, small tools, or toll payments, particularly for crews distant from administrative offices.
- Charities and Nonprofits: Assists with transportation cards, snacks at outreach events, or unexpected printing needs.
- Educational Institutions: Enables small purchases for laboratory equipment, teaching aids, or event logistics.
- Small Businesses and Startups: Used for urgent supply needs, parking fees, or hosting refreshments for client visits.
Calculation Example (Hypothetical Case)
Suppose a nonprofit forecasts typical petty cash needs of GBP 40 per day, with some day-to-day variability. Planning a 10-day replenishment cycle and providing a buffer for unpredictability (using statistical methods), they set their float at GBP 480. If, at review, there is GBP 170 left and GBP 310 in vouchers, a new reimbursement of GBP 310 would restore the float.
Comparison, Advantages, and Common Misconceptions
Comparison with Related Concepts
| Term | Definition/Use | Key Distinctions |
|---|---|---|
| Petty Cash | Fixed float for incidental expenses | Low value, immediate, custodian-managed |
| Cash on Hand | All physical cash held by the business | Includes tills, undeposited revenue, broader scope |
| Cash Equivalents | Near-cash, highly liquid investments | Interest-earning, not for incidental spend |
| Expense Reimbursement | Employee spends own funds, reimbursed later | Claims process, not immediate, for larger/varied sums |
| Corporate Card | Pre-approved purchase tool, tracked by provider | Digital, suited for higher or recurring expenses |
| Change Fund (Till Float) | Cash for change-making in transactions | Not for business expenses, dedicated to point-of-sale |
| Prepaid Expenses | Prepaid for future goods/services (insurance) | Amortized, not liquid, documented by contracts/invoices |
| Contingency Reserve | Large emergency fund, rarely in cash | Policy-driven, for unplanned major events |
Advantages
- Speed and Convenience: Quickly covers unexpected, low-value needs without lengthy approval processes.
- Operational Efficiency: Reduces per-transaction processing time for minor purchases.
- Continuity: Supports ongoing activities during banking system outages or card processing delays.
- Potential for Control: When governed by clear limits and oversight, risks can be managed.
Disadvantages
- Risk of Theft or Misuse: Physical cash is vulnerable if controls are lacking.
- Audit Complexity: Frequent small payments can challenge compliance if receipts are missing or incomplete.
- Administrative Effort: Reconciliation and documentation require dedicated staff time.
Common Misconceptions
- Petty Cash is for All Short-Term Needs: It should not be used for payroll, advances, loans, vendor invoices, or as a discretionary fund.
- Digital Tools Eliminate Petty Cash: Digital alternatives reduce reliance on cash but do not replace petty cash in all operational contexts.
- No Receipts Needed for Minor Sums: Every payout, regardless of amount, should be supported by documentation.
- Anyone Can Access Petty Cash: Only designated custodians, identified in policy, should handle the fund.
Practical Guide
Setting Policies and Controls
- Document a Clear Policy: Specify eligible expenses, transaction limits (such as USD 50 per payout), prohibited uses, and documentation requirements.
- Right-Sized Float: Match fund size to expected transaction volume and exposure risk.
- Custodianship: Assign a primary and backup custodian; separate approval responsibilities where possible.
Implementation Steps
Establish Fund and Procedures
- Estimate requirements using averages and seasonal trends.
- Set up a secured lockbox and sequential voucher system.
- Communicate policy to all staff and assign custodians.
Disbursement Workflow
- Require a written, approved voucher before each withdrawal.
- Attach receipts immediately, noting the specific business reason.
- Decline requests outside policy and redirect to standard procurement as needed.
Reconciliation and Oversight
- Reconcile cash and vouchers at least monthly or when the fund is low.
- Conduct surprise audits and dual sign-off for changes in custody.
- Record overages or shortages, investigate promptly, and address repeated discrepancies.
Digital Integration
- Consider using prepaid cards or approved expense applications where practical.
- Maintain a small cash float for cash-only scenarios while migrating most spending to trackable systems.
Case Studies
In a hypothetical Paris bistro, the head server manages a USD 250 petty cash fund for small emergency buys, such as herbs, propane, or staff taxi fares. Each transaction is recorded with a log entry and attached receipt. Purchases over EUR 25 require owner pre-approval. Nightly reconciliations help keep the fund balanced.
In another example, a Toronto health clinic uses petty cash for courier expenses and parking validation. The designated custodian imposes per-use caps, and monthly audits are conducted by the finance officer.
These cases are illustrative scenarios and not investment advice.
Resources for Learning and Improvement
- Accounting Standards: See ASC 305 (US GAAP) and IAS 7 (IFRS) for cash handling and controls.
- Internal Controls Framework: COSO’s Internal Control–Integrated Framework, and Institute of Internal Auditors (IIA) practice guidance on cash management.
- Regulator Guidance: IRS Publication 463 (meals, travel) and HMRC VAT rules for compliant receipt practices and tax preparation.
- Professional Bodies: Guidance and templates are available from AICPA, ACCA, CIPFA, and the Chartered Institute of Internal Auditors.
- Textbooks and Handbooks: Reference small business accounting manuals and audit textbooks’ cash control chapters.
- Academic Research: Review studies on fraud prevention and cash handling published via Google Scholar or SSRN.
- Templates and Checklists: Access logs, reconciliation forms, and custodian templates from professional association websites.
- Training and Webinars: Join role-based training and scenario webinars from accounting and internal audit institutes.
FAQs
What is petty cash and why does it exist?
Petty cash is a small, fixed cash reserve maintained by organizations for minor expenses when standard payment workflows would be inefficient. It provides a method for addressing urgent, low-value needs promptly.
Which expenses qualify for petty cash usage?
Typical expenses include non-recurring, minor purchases such as stationery, office refreshments, transportation fares, and parking. Salaries, vendor invoices, and capital costs are excluded from petty cash use.
How is the size of the petty cash fund determined?
The amount is based on anticipated small cash needs and a buffer for variability, typically reviewed on a quarterly schedule. Most businesses maintain floats between USD 100 and USD 500 for each site.
Who is responsible for managing petty cash?
A designated custodian and backup custodian manage the fund. Responsibilities include distribution, recordkeeping, receipt collection, and fund reconciliation to ensure alignment with approved float amounts.
How are reimbursements and reconciliations conducted?
Cash on hand and vouchers are reconciled at least monthly or when replenishing the fund. Supporting documents are submitted to accounting for fund reimbursement and matched to expense accounts.
How can risk of theft or misuse be minimized?
Mitigate risk by keeping cash secured, restricting access, maintaining transaction logs, and requiring dual sign-off for reconciliation and custodian transitions. Surprise counts and policy updates help deter misuse.
How should petty cash transactions be recorded for accounting and tax purposes?
Record petty cash as an asset, posting replenishments by expense category and attaching all receipts. Proper documentation supports tax deductions, while missing receipts may impact compliance during audits.
Are digital tools replacing petty cash?
Digital expense tools decrease reliance on physical cash and improve tracking, but petty cash remains in use where cash payments are unavoidable.
Conclusion
Petty cash continues to serve a functional purpose for addressing immediate, minor expenses that do not lend themselves to formal procurement or reimbursement processes. When managed under clear policies, strong custodianship, consistent documentation, and regular reconciliation, petty cash enables timely operations without undermining financial controls. While digital solutions increasingly influence petty cash management, a tightly administered float remains relevant for many organizations. By following recognized practices, leveraging authoritative resources, and maintaining robust internal controls, organizations can manage petty cash with both utility and security.
