Understanding Petty Cash: Usage, Accounting, and Best Practices

What is petty cash?

Petty cash is a small on‑site cash reserve a business keeps to pay for minor, immediate expenses where writing a check or using a corporate card is impractical. Typical funds range from about $100 to $500. Petty cash is an asset on the balance sheet and is intended for incidental purchases such as office supplies, small reimbursements, tips, or taxi fare.

Why businesses use petty cash

• Speed and convenience for low‑value, unplanned purchases
• Avoids delays caused by check processing or card approvals
• Useful for small, frequent expenses (e.g., stamps, snacks)

Common petty cash examples

• Office supplies (pens, tape)
• Coffee, snacks, small gifts or cards
• Local cab fares or parking fees
• Minor event or meeting expenses
• Occasional change for a cash register

Managing petty cash: roles and controls

Implement clear controls to reduce misuse and theft:
* Appoint a petty cash custodian responsible for disbursing funds and keeping receipts.
* Separate duties where possible: one person issues the fund (cashier/bookkeeper) and another disburses it (custodian).
* Limit who can approve disbursements and set a maximum single‑transaction limit.
* Keep the cash in a locked box and perform regular unannounced counts.
* Require receipts or petty cash vouchers for every disbursement; attach documentation to each voucher.
* Reconcile and replenish on a fixed schedule (weekly or monthly) or when the fund nears its floor.

Recording petty cash in the books

Key accounting points:
* Establishing the fund: Debit Petty Cash (asset), Credit Cash/Bank.
– Example: To fund a $300 petty cash box — Debit Petty Cash $300 / Credit Bank $300.
* Daily purchases: No journal entries are made when items are paid from petty cash. Instead, vouchers/receipts are collected and retained.
* Replenishment: When the custodian requests more cash, record expenses and restore the petty cash balance.
– Typical replenishment entry: Debit various Expense accounts (aggregate of vouchers) / Credit Cash/Bank (to reflect the check written to replenish).
* Overages and shortages: Post the difference to a Cash Over and Short (or Over/Short) account.
– If petty cash is short: Debit Cash Over and Short (loss) / Credit Cash/Bank when replenishing.
– If there is an overage: Credit Cash Over and Short (gain) / Credit Cash/Bank appropriately.

Step‑by‑step petty cash reconciliation

1. Count the physical cash on hand.
2. Collect and total all petty cash vouchers/receipts for the period.
3. Confirm: (Cash on hand) + (Total vouchers) = (Fund’s established balance).
4. Investigate discrepancies: math errors, missing receipts, or unauthorized disbursements.
5. Record expense entries and any over/short adjustments.
6. Replenish the fund to its established balance and update the ledger.

Petty cash vs. cash on hand

• Petty cash: A specific small reserve kept for minor internal expenses.
• Cash on hand: A broader term that includes all readily accessible cash and highly liquid assets (cash equivalents) across the business.
  All petty cash is cash on hand, but not all cash on hand is petty cash.

Pros and cons

Pros
* Quick and simple for small, immediate needs
* No advanced authorization required for minor items
* Useful in settings with frequent small transactions

Cons
* Security risks: theft, misplacement, and fraud
* Difficult to track compared with electronic payments
* Requires manual record‑keeping and reconciliation effort
* Considered outdated by some as digital payment options proliferate

Best practices

• Keep the fund size small and appropriate for typical needs.
• Use preprinted petty cash vouchers or a standardized digital form for every disbursement.
• Require manager approval for larger or nonstandard expenses.
• Reconcile regularly and conduct surprise audits periodically.
• Train custodians on procedures and loss reporting.
• Consider alternatives where practical: corporate cards, prepaid cards, or mobile payment apps that provide better traceability.

When to phase out petty cash

If your organization has reliable electronic payment methods that are as fast and more traceable (company cards, digital wallets, expense apps), consider reducing or eliminating petty cash to lower theft risk and administrative overhead.

Summary

Petty cash remains a practical tool for handling low‑value, urgent business expenses when used with strict internal controls and regular reconciliation. Proper setup, documentation, and oversight keep the convenience of petty cash from becoming a liability.