What Is Petty Cash in Business and How Does It Work?

Petty cash provides businesses with a convenient way to handle minor, day-to-day expenditures that are impractical to pay through traditional methods like checks or credit cards. It serves as a small, readily available fund for immediate, low-value transactions, such as purchasing office supplies or reimbursing small expenses. The purpose of petty cash is to facilitate these infrequent, small payments without disrupting larger financial processes.

Creating a Petty Cash Fund

Establishing a petty cash fund begins with determining an appropriate initial amount, which commonly ranges from $50 to $500, depending on a business’s typical small expense volume and frequency. This amount should be sufficient to cover minor costs for a period, perhaps a few weeks, before needing replenishment. Next, a specific individual, known as the petty cash custodian, is designated to be responsible for the fund’s management and security. This person will oversee all transactions involving the cash.

To physically set up the fund, a check is typically written from the business’s main operating account, made payable to “Petty Cash” or simply cashed. This cash is then placed in a secure, designated location, such as a locked box, drawer, or small safe. Maintaining the physical security of the cash is important to prevent unauthorized access. The custodian ensures the cash is stored safely and is only accessible to them.

Operating and Replenishing the Fund

When a small expense arises, the petty cash custodian disburses the necessary cash from the fund. Each disbursement requires proper documentation, typically in the form of a petty cash voucher and an accompanying receipt from the vendor. The voucher should clearly state the date, the amount paid, the purpose of the expenditure, and the signature of the person receiving the cash.

The petty cash system operates on an imprest basis, meaning the sum of the cash remaining in the fund plus the total value of all vouchers and receipts should always equal the original fund amount. For instance, if a fund starts with $200 and $50 has been spent, there should be $150 in cash and $50 in vouchers. When the cash balance runs low, the fund is replenished by the custodian gathering all accumulated vouchers and receipts.

The custodian then calculates the total amount spent and requests a check from the business’s main account for that exact amount, restoring the fund to its original balance. Before replenishment, the custodian reconciles the physical cash with the vouchers to ensure all expenditures are accounted for and match the remaining cash.

Accounting for Petty Cash

In a business’s accounting system, petty cash is recorded as a current asset in the general ledger. This classification reflects its nature as a resource expected to be converted into cash or used within one year. The initial establishment of the fund involves a journal entry that debits the Petty Cash account and credits the Cash account for the specific amount allocated to the fund.

Individual petty cash disbursements are generally not recorded in the general ledger at the time they occur. Instead, the total of these expenses is recorded only when the fund is replenished. During replenishment, the various expense accounts corresponding to the accumulated vouchers are debited for their respective amounts. For example, office supplies expense or travel expense would be debited.

Simultaneously, the main Cash account is credited for the total amount of the replenishment check. This approach simplifies record-keeping by avoiding numerous small entries for each minor expense. Petty cash impacts the balance sheet by being listed as an asset, while the expenses paid from the fund are reflected on the income statement during the replenishment entry, contributing to the overall financial picture of the business.

Protecting the Petty Cash Fund

Safeguarding the petty cash fund against misuse or theft is achieved through several internal control measures. The cash should always be kept in a secure, locked container, such as a petty cash box or a small safe, to prevent unauthorized access. Only the designated petty cash custodian should have access to the fund.

Strict adherence to documentation requirements is also a protective measure; every disbursement must be supported by a signed voucher and a vendor receipt. This creates an audit trail for all expenditures. Regular, unannounced counts of the cash and reviews of the accompanying vouchers should be conducted by someone other than the custodian. This independent verification helps ensure the accuracy of the fund and deters irregularities.

Establishing clear, written policies for the use and management of the petty cash fund provides guidelines for all involved parties. These policies outline permissible expenditures, documentation requirements, and replenishment procedures, reinforcing accountability.