Definition
Petty cash is a small reserve of physical money kept at a business premises for the purpose of covering minor, day-to-day expenses that are impractical to pay by invoice, credit card, or bank transfer. Common uses include buying office supplies, reimbursing staff for small out-of-pocket costs, covering postage, or paying for a last-minute delivery fee.
How a Petty Cash Fund Works
The amount held in a petty cash fund varies by business size and spending patterns, but is typically between $50 and $500. A designated petty cash custodian, usually a receptionist, office manager, or accounts assistant, is responsible for disbursing funds, collecting receipts, and reconciling the fund at regular intervals.
Every payment from petty cash should be supported by a receipt or a petty cash voucher. The voucher records the date, the amount paid, the purpose of the expense, and the name of the person who received the money. When the fund runs low, the custodian submits all receipts to the finance team and the fund is replenished back to its original balance through a cheque or bank transfer.
The Imprest System
From an accounting perspective, petty cash operates as an imprest system. The fund is established at a fixed amount. Payments are made from the fund and recorded as expenses. When the fund is replenished, the expense total is entered into the accounts, and the cash balance returns to the original imprest amount. At any point, cash on hand plus receipts should equal the original fund total.
Petty Cash Controls and Best Practices
Controls are important even for small amounts. Unmonitored petty cash funds are vulnerable to misappropriation. Best practice involves dual authorisation for disbursements above a set threshold, surprise reconciliations, and keeping the fund locked when not in use.
As digital payment methods have become more accessible, some businesses have replaced petty cash entirely with a dedicated low-limit business debit card. This approach generates an automatic digital record of every transaction, reducing the administrative burden of manual reconciliation.