Key Takeaways
- Petty cash covers minor, low-value expenses.
- Imprest system keeps fund balance constant.
- Custodian manages cash and vouchers securely.
- Set clear limits and expense policies.
What is Understanding Petty Cash: Usage, Accounting, and Best Practices?
Petty cash is a small fund of discretionary cash held by businesses to cover minor expenses that are impractical to pay by check or card, such as office supplies or postage. This system streamlines low-value transactions while maintaining accountability through controlled disbursement and replenishment processes.
Managing petty cash effectively involves clear policies and accurate record-keeping, often supported by T-accounts to track transactions and balances within accounting systems.
Key Characteristics
Petty cash has distinct features that help businesses handle minor expenses efficiently and securely.
- Fixed Fund Amount: The petty cash fund is usually set at a constant amount using the imprest system, replenished periodically to maintain that balance.
- Discretionary Spending: Used for small, incidental costs like office supplies or staff refreshments, reducing administrative overhead.
- Custodian Responsibility: A designated custodian manages the fund, stores cash securely—often in a safe deposit box or locked container—and maintains vouchers or receipts.
- Documentation: All disbursements require receipts or vouchers detailing date, amount, and purpose to ensure transparency and audit readiness.
- Limits and Policies: Organizations set spending caps (commonly $25–$75), eligible expense types, and approval processes to prevent misuse.
How It Works
Petty cash operates under the imprest system, where an initial fixed amount is issued and replenished as funds are spent. You start by establishing the fund through a cash transfer recorded in your accounting books, then distribute cash for approved expenses using vouchers that document each transaction.
When the fund runs low, you reconcile the cash on hand with vouchers, then replenish the fund by issuing a check for the exact amount spent. This cycle helps maintain a consistent petty cash balance and accurate financial records.
Examples and Use Cases
Petty cash is widely used across various industries to handle everyday minor expenses efficiently.
- Airlines: Delta and American Airlines may utilize petty cash to cover incidental costs such as local transportation fares or small office supplies at remote locations.
- Office Environments: Funds for routine items like postage stamps, stationery, and emergency printer repairs ensure smooth operations without delays.
- Hospitality: Petty cash covers client lunches or staff refreshments, supporting business relationships and morale.
- Travel Expenses: When procurement cards are unavailable, petty cash reimburses taxi fares or minor travel-related costs.
Important Considerations
To safeguard petty cash, implement strong internal controls including appointing a custodian and setting clear spending limits. Regular reconciliation and documentation help prevent fraud and errors, while secure storage—such as a safe deposit box—minimizes theft risk.
Consider integrating modern alternatives like procurement cards featured in our guide on best business credit cards to reduce cash handling. Employing data analytics on petty cash usage can also uncover spending patterns and improve budget management.
Final Words
Effective petty cash management hinges on clear policies and diligent record-keeping using the imprest system. Review your current petty cash procedures to ensure proper controls and consider periodic audits to maintain transparency and accuracy.
Frequently Asked Questions
Petty cash is a small amount of cash kept on hand to cover minor, incidental expenses that are impractical to pay by check or card, like office supplies or postage. It helps streamline payments for low-value transactions while maintaining accountability.
Common petty cash expenses include office supplies, postage, staff refreshments, client lunches, small repairs, and travel-related costs like taxi fares. These expenses are usually low-value and routine or occasional in nature.
The imprest system maintains a fixed petty cash balance by replenishing the fund to its original amount periodically. Expenses are tracked with vouchers, and journal entries are made only when the fund is established or replenished, not for each transaction.
A designated custodian, such as a bookkeeper, should manage petty cash. They store the cash securely, issue vouchers, keep records of transactions, and ensure the fund is reconciled regularly.
Best practices include appointing a custodian, setting clear spending limits and policies, requiring approvals for discretionary expenses, keeping petty cash in a locked box or safe, and reconciling the fund monthly or at each replenishment.
Petty cash is recorded as a current asset on the balance sheet under cash equivalents. It reflects the fixed amount maintained in the petty cash fund until replenishment.
When petty cash is low, the custodian submits vouchers for expenses, and the fund is replenished by issuing a check for the exact amount spent. This keeps the fund at its original imprest level and records expenses properly.
Yes, businesses typically set transaction caps ranging from $25 to $75, depending on their policies. This helps control spending and encourages using other payment methods for larger expenses.
