Petty Cash

What is petty cash?

Petty cash is a small amount kept on hand to pay for minor expenses without writing checks. It's also an account in a company's ledger documenting the amount held for these small, miscellaneous costs. Depending on the business, petty cash typically ranges from $30 to $300.

How does petty cash work?

Petty cash provides convenience when writing a check, but using a company credit card isn't practical. Businesses usually maintain a petty cash fund between $100 and $500. Common uses include:

  • Office Supplies
  • Client cards
  • Flowers
  • Catered meals for staff
  • Reimbursing employees for small business expenses

A designated custodian manages the petty cash fund, enforces policies, obtains replenishments, and allocates funds. Each payment made from petty cash is tracked with a petty cash voucher, and expenses are recorded in the company's ledger when the fund is replenished.

Further reading: How to read cash flow statements for beginners?

Recording petty cash

Even though petty cash transactions are small, they're still recorded on financial statements. When petty cash is used, no immediate journal entry is made. Entries occur when the custodian requests more money and provides receipts for the spent amount. This results in a journal entry debiting the petty cash fund and crediting cash.

If the fund has an overage or shortage, it’s recorded in an over/short account. A credit entry indicates a surplus, while a debit entry indicates a deficit, ensuring the fund balances upon reconciliation.

Example of how petty cash works

Company: GreenLeaf Marketing Agency

Scenario: Managing small, everyday expenses efficiently.

Setting Up Petty Cash

  1. Establishing the Fund:some text
    • GreenLeaf Marketing decides to set up a petty cash fund with an initial amount of $500.
    • This amount is withdrawn from the company’s main bank account and placed in a secure cash box.

Using Petty Cash

  1. Making Small Purchases:some text
    • Throughout the month, various small expenses arise:some text
      • Office supplies: $50
      • Team lunch for meeting: $120
      • Parking fees for client visit: $30
      • Postage stamps: $20
  2. Recording Transactions:some text
    • Each time money is taken from the petty cash box, an employee fills out a petty cash voucher, noting the amount, date, purpose, and attaching any receipts.
    • For example, for the team lunch:some text
      • Petty cash voucher completed for $120.
      • Receipt for the lunch attached to the voucher.

Replenishing Petty Cash

  1. Reconciling and Replenishing:some text
    • At the end of the month, the petty cash box is reviewed.
    • The total spent is calculated: $50 (supplies) + $120 (lunch) + $30 (parking) + $20 (postage) = $220.
    • Remaining cash in the box: $500 (initial) - $220 (spent) = $280.
  2. Replenishment:some text
    • To bring the petty cash fund back to its original amount, GreenLeaf issues a check for $220 from the main bank account to replenish the petty cash box.
    • The check is cashed, and $220 is added back to the petty cash box, restoring it to $500.

Accounting for Petty Cash

  1. Bookkeeping:some text
    • The total amount spent ($220) is recorded in the company’s accounting system under appropriate expense categories (office supplies, meals, parking, postage).
    • This ensures that all petty cash transactions are tracked and accounted for in the financial records.

In this real-world example, GreenLeaf Marketing effectively manages its petty cash fund to cover small, everyday expenses without using checks or credit cards for minor transactions. By recording each expense with vouchers and reconciling the fund regularly, the company maintains accurate financial records and ensures efficient use of petty cash.

Advantages of petty cash

  • Speed and Convenience: Cash is often the quickest and simplest payment method.
  • Handles Unexpected Costs: Useful for small, unforeseen expenses like tips or cab fares.
  • Avoids Reimbursement Hassles: Employees don’t need to pay out-of-pocket and seek reimbursement.
  • Covers Routine Expenses: For everyday items like cleaning supplies or postage.
  • Makes Change: This function can be used to make changes if the till is low, though this shouldn't be frequent.

Disadvantages of petty cash

  • Tracking and Security: Cash is hard to track and secure, making it easy to disappear.
  • Extra Management: Requires additional effort to manage, track, and reconcile.
  • Declining Use: With the rise of cashless transactions, even small businesses are moving away from cash.
  • Outdated Concept: Many believe petty cash is outdated, with alternatives like credit/debit cards, electronic wallets, and payment systems like Venmo or PayPal being more convenient.
  • Security Concerns: Cash on hand can invite theft, a significant concern for small businesses.

Read more: Accounting 101: debit and credit explained

In short

Petty cash is a small fund for minor expenses that don’t warrant writing a check or using a credit card. In larger companies, individual departments might maintain their petty cash reserves. It's used for office supplies, client greeting cards, flowers, catered lunches, and employee reimbursements.

The main benefits of petty cash are its speed, convenience, and simplicity. However, it’s vulnerable to theft and misuse and requires frequent monitoring and reconciliation.

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