Is Petty Cash an Expense? An Accounting Explanation

Petty cash is a common accounting practice for many businesses, simplifying the payment of small, day-to-day expenditures. It often raises questions about its classification as an expense. While the fund itself is not an expense, its management and the recording of individual disbursements involve specific accounting treatments. This approach helps maintain accurate financial records and provides control over minor outlays.

Understanding Petty Cash

Petty cash refers to a small amount of cash held on hand by a business to cover minor expenses that do not warrant checks or electronic payments. This fund provides convenience and efficiency for transactions like purchasing office supplies, postage, or reimbursing small employee expenses. A petty cash fund is established by cashing a check for a set amount, often ranging from $100 to $500, and placing the cash in a secure location, such as a locked box or drawer.

The initial establishment of a petty cash fund creates an asset, not an expense, on the company’s balance sheet. This cash remains an asset until it is disbursed. Businesses manage petty cash using an “imprest system,” where a fixed amount is set aside for the fund. Under this system, the balance of the petty cash account in the general ledger remains constant unless the company decides to increase or decrease the fund’s size.

Recording Petty Cash Disbursements

While the petty cash fund itself is an asset, the money spent from the fund is recorded as an expense. When cash is taken from the petty cash fund, a petty cash voucher or receipt is completed. This document details the date, amount, purpose of the expenditure, and the recipient of the funds.

These individual expenditures, such as payments for office supplies or minor employee reimbursements, are then classified into appropriate expense accounts. For instance, if cash is used to buy stamps, it would be recorded as postage expense. Although the cash leaves the fund, the formal accounting entry for the expense occurs later, during the replenishment process.

Replenishing the Petty Cash Fund

When the petty cash fund runs low, it needs to be replenished. The custodian of the fund gathers all the petty cash vouchers and receipts for the expenditures made since the last replenishment. These vouchers serve as documentation for the cash disbursed. A check is then issued for the exact amount of the accumulated disbursements.

Issuing this replenishment check is when expenses are formally recorded in the general ledger. The amount of the check is debited to the specific expense accounts corresponding to the vouchers, such as office supplies expense or travel expense, and credited to the main cash account. This process ensures that all expenditures are accounted for, maintaining the imprest balance.